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 earlier planned around avoiding state tax has got rationalised to leverage efficiencies of scale and optimise location etc. This has resulted in major changes around sourcing, warehousing and distribution.
3 Ways to Optimise your supply chain for GST
1. Warehousing Cost
In the earlier tax regime, an inter-state sale of goods was liable to Central Sales Tax @ 2% (subject to declaration forms). But, CST paid on purchase of goods was not available as set-off. Thus, it resulted in cost in the supply chain transaction. However, if the good is moved for stocking and not for sale, then CST was not required to be paid.
Hence, to avoid paying CST, most companies had set up branches /warehouses in different states to show product movement under stocking to save CST. Additionally, many states (such as Maharashtra, Gujarat) had introduced provisions for reduction in input tax credit of VAT for stock transfers. This resulted in loss of tax credit to businesses.
In the GST regime, an inter-state transaction in goods attracts Integrated Goods and Service Tax (IGST). Credit of IGST paid on purchase is available against output GST liability.
Hence the earlier rationale (i.e. to save CST) for setting up branches/ warehouses in various states has become redundant. While product cost earlier included inventory carrying cost along with logistics, GST has brought down inventory carrying cost resulting in reduced product costs. Hence, the companies need to reconsider warehousing.
2. Reconsider Operations Planned around Area based Incentives
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 have to re-think their plans around investment and future expansion in such locations because GST is based on place of supply.
With GST, tax exemptions, remissions etc. related to industrial incentives, if at all needed, are 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, area-based exemptions are marginalised in the GST era, however, units that were earlier exempted are required to pay GST on their finished goods first and then claim refund.
3. Availment of Credit
In the earlier tax regime, there were restrictions on availment of credit for a service provider. A logistics service provider could not avail credit of VAT paid on inputs procured. This became a cost in the supply chain. Further, traders or retailers or malls could not avail credit of service tax and excise duty paid on their purchases. This meant that earlier a retail mall owner was not able to avail credit of service tax charged by a logistics service provider and thus it became a cost in the transaction.
In GST, this has changed to a large extent.
Way Forward
With GST coming in, warehousing decisions are nowe based on business considerations such as efficiencies of scale, logistics etc. rather than for tax purposes. Also, the removal of area based exemptions has lead to a change in manufacturing locations to newer locations based on business needs.
With GST, instead of maintaining smaller warehouses in each and every state, manufacturers are setting 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 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 has impacted service levels.
As an aside, this has opened a window of opportunity for logistics and warehousing companies as there is centralization of warehouses and manufacturing locations.
Also, the cascading effect of local taxes and complex regulatory structure of central and state bodies in earlier times had 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 have been once again able to 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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