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At present, the
distortions in supply chain are synonymous with complexities such as area-based
exemptions, factory-gate price for the levy of Cenvat, tax barriers to
inter-state trade and multiple levies at various levels, including the central
sales tax, octroi, purchase tax and stamp duty. No credit is allowed for many of
these levies, which leads to significant cascading of taxes. As a result, the
decisions of the organisations about inventory and distribution management are
guided more by tax considerations than operational efficiency.
Here are a few examples:
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Currently, supply chains
are invariably designed to minimise the burden of the
Central Sales Tax (CST) on inter-state sales. Since no
credit is allowed for CST, manufacturers set up
distribution centres in individual states where the
consumers are located and make local sales from these
centres.
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To avoid the
non-creditable VAT on their inputs, service providers
such as hotels, tour operators and transportation
companies prefer to import their machinery and equipment
and other inputs directly from abroad, without incurring
the state VAT at the time of import.
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Octroi in Maharashtra
discourages setting up of manufacturing and distribution
centres within the municipal boundaries where the tax
applies.
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Manufacturers will create
business structures so that marketing and distribution
costs are incurred beyond the factory gate where Cenvat
applies. Application of Cenvat on the basis of the
Maximum Retail Price (MRP) can have the opposite effect
of encouraging manufacturers to incur costs prior to the
factory gate.
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Companies that have set
up manufacturing units in excise-free zones like Baddi
in Himachal Pradesh look for ways to minimise Cenvat on
their inputs, for which no credit is allowed. One way to
minimise the input tax is to source the inputs
internally, rather than procuring these from third
parties. Area-based exemption creates incentives for
vertical integration and discourages outsourcing of
inputs.
GST aims to rationalise and simplify the consumption tax structure at both
Centre and state levels. It is expected to replace almost all indirect taxes,
eliminate exemptions, do
away
with the current multiple layers of taxation and follow the principle of
destination, instead of origin.
The greatest virtue of GST is that it would make the supply chain tax-neutral.
The final tax on a product would be the same, irrespective of the structure or
location of its production, procurement of inputs, and the nature and complexity
of the distribution chain. GST is charged on each transaction in the supply
chain, with registered
businesses
receiving a credit for GST paid on purchases. The smooth flow of input tax
credit provides the element of tax neutrality. For maintaining this neutrality,
it would be important that no exemptions are provided (especially for
business-to-business transactions) and full credit is made available for the tax
paid on inputs in B2B transactions without any blockages to avoid cascading of
tax.
Source: Business Standard, India, dated
28/05/2010
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