LOGISTICS & SUPPLY CHAIN MANAGEMENT PROJECT REPORT
IMPACT OF GOODS & SERVICES TAX (GST) ON SUPPLY CHAIN MANAGEMENT (INDIAN PERSPECTIVE)
GROUP NO: A 06
PROJECT OVERVIEW 1. Current Tax structure vs GST structure 2. Tax implications on Supply chain Management 3. Impact on Procurement 4. Impact on Freight & Transportation 5. Impact on Warehouse & Inventory Management 6. Impact of GST on Manufacturing sector 7. Impact of GST on Retail / FMCG sectors 8. Impact on Logistics CURRENT INDIAN TAX STRUCTURE The Current Indian tax system has a dual structure. The tax is levied by Central government as well as State government .There exists a double taxation policy, tax paid earlier gets re-taxed, resulting in firms paying tax on tax paid. Adding to this, the governments have multi-layered system which brings inefficiencies and complication in the system.
India’s Present tax structure Source: Goods and Services Tax – Accenture Management 2011
• CST: Tax is levied on inter-state transaction of goods .In order to avoid this , manufacturers typically move goods to a warehouse in each state as internal stock transfer and sales that takes place are then shown as intra-state transactions.CST has been reduced to 2% . • Octroi tax: Tax levied on entry of goods into a town or city .To avoid paying tax on inventory inside city limits, manufacturers locate warehouses outside city limits and move the goods into the city only when actual sales takes place. This results in addition of tier in supply chain and consequently higher costs. • Excise Duty: The companies are deploying their manufacturing plants to regions which are exempted from excise duty even though high logistics cost, high working capital and high timeto market is incurred.
• Value added tax (VAT): It varies from one state to another and are exempted from Special Economic zones (SEZ) • Service Tax: It is paid for any services like logistics involved in getting the raw material to the end customers GST STRUCTURE In its simplest form GST is a single comprehensive tax levied on Goods and Services at every stage of the supply chain from manufacture or provision of service to consumption. At each transaction point (sale or provision of service) the seller or service provider will claim the input credit of tax which he has paid while purchasing the goods or service. This will avoid the incidence of cascading or ‘tax on tax’.
India’s tax structure after GST Source: Goods and Services Tax – Accenture Management 2011
GST would have three components –
Central GST (CGST) – to be administered by the Centre
State GST (SGST) – to be administered by the State Governments
Inter-State GST (IGST) - to be levied on inter-State trade and administered and collected by the Centre. The proceeds would be transferred accordingly.
Source : www.india-briefing.com
TAX IMPLICATION ON SUPPLY CHAIN MANAGEMENT Currently the Indian company takes decision on logistics and supply chain for their sourcing, distribution and warehousing based on the state level tax avoidance mechanism instead of operational efficiencies. Some of the options in relation with designing supply chain • In House manufacturing or contract manufacturing • Direct sales vs. stock transfers • Manufacturing and warehousing locations • Interstate or intrastate procurement of goods and services • Indigenous supplies vs. Imports Manufacturers in India have to bear the brunt of a plethora of taxes as follows:
Imported raw and packaging materials are subject to a complex regime of customs duty, CVD, Cess and other levies. The multiplier for landed cost is as high for finished goods even though the base customs duty is very minimal. Many of the levies cannot be set off and downstream taxation is applicable on the duties as well.
Excise duty would then be levied on manufacture. Central Sales Tax may be applicable if interstate sales are being done. VAT would be applicable on sales within a state. Entry tax may also apply for some states. Service Tax would be levied on transport.
In addition, legal compliance, book keeping and litigation further add to the administrative and cost burden. Advantages that India has as a low cost manufacturing base get nullified due to the taxation structure. The introduction of a unified system of GST will simplify the whole regime to a very great extent. IMPACT OF GST ON PROCUREMENT Raw materials cost constitute the major part of the product cost. Most of the top companies try to reduce the procurement cost, since it can have major effect on other factors. No policy of tax credit for inter-state procurement in the current tax form. Cross utilization of ITC (Input tax credit) would be allowed in Inter-state supply of goods The additional customs duty in the import of goods will be subsumed by the GST Under GST inter-state sales transactions become tax neutral . GST can play a vital role in the reduction of procurement cost. It can solve many conspiracies & can answer to certain decision making questions.
Intra-state Vs Inter-state procurement of goods – Manufacturers lose out on quality due to interstate tax issues & procure from local vendors, GST can eliminate that factor.
Can suppliers be consolidated?
Import vs Local Raw material vendors
In-house Vs contract - Most of the outsourcing works can be given to the contact vendors. Hence company can concentrate on the essential activities of the business.
PROCUREMENT STRATEGIES POST GST
Procurement strategy will move away from taxation focus to focus on time and quality of materials.
Process redesign – Consolidation of suppliers and increased options to consider – Importing materials
Contract Renegotiation – Suppliers count will decrease for a company moving towards consolidation of suppliers; leads to contract renegotiation with suppliers for long-term benefits
Focus will move from the producing states to the consuming states since the tax arbitrage of states will go away
Reliability and Quality will become important parameters for consideration of suppliers
IMPACT ON FREIGHT & TRANSPORTATION It is a matter of concern that India’s spend on primary logistics is very high (Rs 2.7 Trillion in 2008-09 equivalent to 8.2% of GDP vs 5-6% for developed countries due to several built in inefficiencies. All movement of raw material, packaging and finished goods across the country is by road. Rail transport has virtually ceased to service this sector. Air transport is obviously expensive and is resorted to only in a crisis situation. Road transport in turn has its own issues. Poor physical infrastructure, badly maintained vehicles, checkpoints and entry barriers at all state borders make transit a long drawn out process. It can take upto 2-3 weeks for goods to reach from a factory in South India to North India whereas the same distance would be covered in 2-3 days in a developed market. Stock in transit is a significant element in the overall inventory. The slow growth in establishment of professional trucking fleets is a matter of concern. Most companies being highly cost conscious tend to trade off future efficiency for current cost. This effectively reduces the usage of professionally managed fleets. With the advent of GST there is likely to be some consolidation at the company level.
Hopefully, there will also be a greater role for professional 3rd Party Logistics Professionals who can bring about much needed consolidation and expertise into this segment.
GST can also reduce the wastage time at the interstate borders. This can reduce the transit time to a considerable level.
Avg. Inventory days can be reduced. Since interstate transactions are tax free, Replenishments can be made quickly from other states. Hence Avg. Inventory in hand will be reduced
Maximum usage of Cross docking techniques
IMPACT ON WAREHOUSE & INVENTORY MANAGEMENT Goods & services Tax can help the top management in solving most of the decision regarding the Warehouse & Inventory management policies.
Choice of Warehouse Locations, Depot Locations with respect to the Plants and Markets
Choice of the Warehouse Capacity and Depot Capacity – Safety stock levels & reorder levels can be identified easily
Choice of Inventory strategies such as Replenishment cycle, Safety Stock, Milk Runs etc.
Choosing between Continuous policy and Periodic review policy.
No. of Distribution centres/ C&FA can be reduced &service level can be improved through interstate goods movement.
Large regional logistics park can be developed to modernize logistic infrastructure. By this, it is possible to combine with other players in stocking the products. Hence the holding costs will reduce.
Improved Assortment
Larger warehouses would make investments into automation, racking systems and ERP systems more practical and cost effective.
IMPACT OF GST ON MANUFACTURING SECTOR GST can benefit the manufacturing sector in the following ways
More flexibility in vendor selection, as location will no longer be a constraint.
Discontinuation of all area based excise exemptions and SEZ related exemptions
Auto component manufacturers setting up units close to OEM plants for VAT credit chain can be avoided.
Tax incentives will be provided equally in all states. Hence, new plants can be opened in any states which will boost up employment.
Stocking of Pharma goods at Union territories can be avoided. Initially, due to Tax exemptions, Pharma companies were stocking their products in Union territories & in special economic zones (SEZs).
IMPACT OF GST ON RETAIL / FMCG SECTORS Over the years FMCG companies have responded to the tax regime by developing a chain of C&FA agents in each state. Goods are transferred to the C&FA (Clearing & Forwarding agencies) without a title transfer thereby avoiding the incidence of Central Sales Tax. However it is also true that stock movement to smaller distributors is difficult from long distances. For instance if we consider a large state like UP, most FMCG companies would need to develop 3 C&FA’s to cover the state effectively especially if they are covering smaller markets. Typically,
the locations may be at Ghaziabad, Lucknow and Varanasi. It is a moot point whether after the introduction of CST, FMCG companies would find it suitable to reduce or relocate their C&FA’s in the state of UP. As long as distributors continue to operate at town level, servicing requirements may make it imperative to continue with distributed warehousing. It is possible that the numbers of C&FA’s may come down to some extent. For example if interstate servicing of distributors does not attract tax, a C&FA at Ghaziabad could service both Delhi and Uttarakhand in addition to West UP.
Total warehouse space may also come down as companies would be able to use their warehouses more effectively and efficiently.
Larger warehouses would make investments into automation, racking systems and ERP systems more practical and cost effective. At a rough estimate, these investments become practical for warehouses larger than 30,000 sq ft. Transportation will also become more efficient and cost effective with the use of larger vehicles for stock replenishment.
This will help make information visible much further up and down the supply chain and make it easier to integrate processes for sharing data such as demand signals, inventory levels, alternate transportation routes, etc. – a definite plus in terms of demand planning and inventory rationalization.
Inventory, transit stocks, stock outs would all come down. Also, with stocks aggregated at fewer warehouses, information management can improve, which in turn will improve planning and assortment availability.
CFAs can now become bona fide third-party logistics providers. At the same time, customers’ demands for more value added services will boost the adoption of technology solutions such as warehouse management systems and track-and-trace offerings.
Flexibility of differential pricing policy.
Design of the Supply Chain such as Meshed Design vs. Hub and Spoke vs combinations
Will be able to compete in international markets due to lowered costs of FG.
In E-commerce, fulfilment centres can be setup at major cities to reduce delivery time
IMPACT OF GST IN 3PL & 4PL LOGISTICS The evolution of supply chain with increasing 3PL, 4PL providers underline the need for having an efficient management to provide the end-to-end supply chain solutions .Tax neutralization through implementation of GST will contribute to streamlined warehousing by decreasing the small warehouses that cropped up to cater to customers in different states and increases the average warehouse size. The focus of supply chain management will shift from avoiding tax to reducing overall supply chain cost and asset returns, while developing the core competencies and creating customer centric network structures. The share of 3PL, 4PL providers rise further.
Opportunities in various supply chains Inbound Supply Chain: The infrastructure of logistics will gain importance over the location of the plant under GST regime. New opportunities for outsourcing will be created in services like carrier services and forwarder services Outbound Supply Chain: In the post GST regime, the sales and distribution models of the firms will undergo change which will act as driver. Opportunities in warehouse management and distribution operations will increase outsourcing Aftermarket Supply Chain: In the aftermarket customer service will drive outsourcing in claims management as value added service.
REFERENCES
Goods and Services Tax-Responding to an unprecedented opportunity to transform supply chain performance in India, 2011, Accenture Management Consulting
Looking Ahead –The Big Opportunity for Network Design - GST Introduction in India, ITC Infotech GST :Impact on the Supply Chain , Techopak Perspective, Volume 2 India’s Goods and Service Tax: the Case for Distribution Network Redesign , 2012, Cognizant GST: An Opportunity to reassess your Supply Chain-Tata Strategic Management Group,2011 Impact of GST (Goods and Service Tax) On Supply Chain Structure and Operations-Indus Momentus,2010 Status of GST-Central Board of Excise and Customs, 2014.
