by CA Pritam Mahure | May 30, 2017
The Goods & Services Tax is one step closer to reality with the rates of most products being announced yesterday, May 18, 2017. Based on the proposed rates, it does seem that most products will see reduced costs due to a reduction in cascading tax in the supply chain.
The product supply chain is the very foundation of product delivery comprising of individuals, technology, activities and resources involved in the movement of items from manufacturing till delivery.
Some typical links in the supply chain are:
· Supplier to Manufacturer
· Manufacturer to Wholesaler
· Wholesaler to Retailer
· Retailer to Consumer
With GST, logistics and supply chain for manufacturers that might be currently planned around avoiding state tax will get rationalized to leverage efficiencies of scale and optimize location etc. This will involve major changes around sourcing, warehousing and distribution.
Here are 3 things to consider so that you can optimize your supply chain to be prepared for GST.
In the current tax regime, an inter-state sale of goods is liable to Central Sales Tax @ 2% (subject to declaration forms). But, CST paid on purchase of goods is not available as set-off. Thus, it results in cost in the supply chain transaction. However, if the good is moved for stocking and not for sale, then CST need not be paid.
To avoid paying CST, most companies have set up branches /warehouses in different states to show product movement under stocking to save CST.
Additionally, many states (such as Maharashtra, Gujarat) have introduced provisions for reduction in input tax credit of VAT for stock transfers. This also results in loss of tax credit to businesses. In the GST regime, an inter-state transaction in goods will attract Integrated Goods and Service Tax (IGST). Credit of IGST paid on purchase would be available against output GST liability.
Given the above, the current rationale (i.e. to save CST) for setting up branches/ warehouses in various states will become redundant. While product cost today includes inventory carrying cost along with logistics, GST will bring down inventory carrying cost resulting in reduced product costs. Hence, the companies may have to reconsider warehousing.
Area based incentives are offered by the government to promote investment in a particular state/location such as Baddi (Himachal Pradesh), Kutch (Gujarat) etc. This means that firms receive tax breaks and other incentives to locate or expand such areas. Many large manufacturers have therefore made heavy capital investments in these geographically distant areas on such sops offered by the government.
However, with GST kicking in, companies may have to re-think their plans around investment and future expansion in such locations.
With GST, tax exemptions, remissions etc. related to industrial incentives, if at all needed, would be converted into cash refund schemes. The government also intends to have minimum tax exemptions in the GST regime so that the supply chain does not snap. Therefore, it is broadly anticipated that area-based exemptions may not continue in the GST era, however, units that are currently exempt may be required to pay GST on their finished goods first and then claim refund.
Currently there are restrictions on availment of credit for a service provider. A logistics service provider cannot avail credit of VAT paid on inputs procured. This becomes a cost in the supply chain. Further, traders or retailers or malls cannot avail credit of service tax and excise duty paid on their purchases. This means that today a retail mall owner will not be able to avail credit of service tax charged by a logistics service provider and thus it becomes a cost in the transaction.
In GST, this will change to a certain extent.
With GST coming in, warehousing decisions will be based on business considerations such as efficiencies of scale, logistics etc. rather than for tax purposes. Also, the removal of area based exemptions may lead to a change in current manufacturing locations to newer locations also based on business needs. With GST, instead of maintaining smaller warehouses in each and every state, manufacturers will set up fewer and bigger warehouses, and follow a hub and spoke model for freight movement from warehouses to manufacturing plants, distributors and retailers.
The flip side is that companies will face challenges in route planning while having to deal with deliveries across a wider geographical area. In case of services or deliveries that require lower lead times, this could also impact service levels.
As an aside, this will open a window of opportunity for logistics and warehousing companies as there would be centralization of warehouses and manufacturing locations.
Also, the cascading effect of local taxes and complex regulatory structure of central and state bodies in current times have added to inefficiencies for businesses. Processes like supply chain management which should have been focused on customer service and delight, were instead skewed towards saving tax. However, with GST coming in, companies can once again focus on core business priorities that drive key decisions around their supply chain. The key to maximum gain lies in proactive planning and organization wide implementation to create competitive advantage.
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