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.

Indias 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 time-
to 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.

Indias 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 Indias 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&FAs 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&FAs
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.

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.
It is possible that the
numbers of C&FAs 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.
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
Indias 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.