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One of the key challenges
relating to the GST is with regards to supply chains.
Now, the supply chains are impacted by several forces,
some intrinsic to the organisation, some market specific
and some fiscal in nature. Fiscal considerations have
historically been a key determinant of supply chain
structuring in India with manufacturing bases and
distribution networks engineered primarily to harness
fiscal benefits. The availability of tax exemptions/
benefits and the prevalence of differential taxes based
on geographical locations have influenced the
structuring of supply chains, procurement patterns and
distribution networks. The dual GST would significantly
impact supply chains from procurement through
manufacturing to distribution. The dual GST presents
both challenges and opportunities in this regard.
The existing indirect tax regime has several
characteristics which negatively impact supply chains.
These range from irrecoverable taxes such as the Central
Sales Tax (CST), complex documentation of inter State
movement of goods, entry barriers at State borders
resulting in long transportation times and imposition of
local levies such as entry taxes and octroi upon
physical entry of goods into designated areas. These
characteristics add to the cost of doing business in
India. On the other hand, the GST endeavours to foster a
single market in India through a seamless and uniform
application of the CGST and the SGST on all taxable
supplies, throughout the supply chain.
Fundamentally, the GST moves away from origin based
taxation to a destination based consumption tax. This
means that all taxation will be based on where
consumption of a good or a service takes place. Also,
the taxable supplies under the GST will extend to all
inter State movement of goods, including on branch or
consignment transfers not resulting in a sale of goods.
This has major implications for supply chains,
particularly on classic hub and spoke arrangements of
centralised manufacturing and disaggregated
distribution. Further, the CGST, which was hitherto
limited to the manufacturing stage, as an excise tax,
will now be applicable throughout the chain subject of
course to turnover thresholds, below which the tax will
not apply at all.
These thresholds will be different for the CGST and the
SGST respectively. Also, the point that the CST will be
abolished/discontinued is equally important from a
supply chain configuration standpoint. It is evident
from the First Discussion Paper on the GST, released on
10th November, that the Centre will levy an Integrated
GST (IGST), which would be the aggregate of the CGST and
the SGST, on all inter-State supplies of taxable goods
and services with appropriate provisions for taxation of
branch or consignment transfers.
The Discussion Paper also indicates that the existing
locational exemption concessions in relation to special
industrial area schemes industrial incentives etc. would
be converted into cash refunds. This would mean that the
CGST and SGST will be charged on supplies from such
units, thereby restoring the GST chain. This also has
its own implications.
These changes pose challenges for companies as to how
they might engineer their supply chains so as to be GST
efficient. It is probably fair to suggest that the
longer the supply chain, the more the tax points in the
GST scheme of things and hence increased compliance
costs. The challenge and the opportunity is to thus
compress supply chains for GST efficiency while ensuring
that the business objectives in and around supply chains
are also met. The dual GST consequently affords
companies significant opportunities for realignment of
procurement, manufacturing and distribution / sales
patterns and to engineer their supply chains on purely
economic considerations as opposed to fiscal
considerations. For this purpose, a comprehensive GST
impact assessment would need to be carried out.
Based on the information available around the structure
of dual GST, the potential issues and areas of impact
for a particular company could be identified and a
detailed mapping of the ‘as is’ supply chain and the
associated current tax costs would be done. Thereafter,
the impact of the dual GST on this 'as is' model could
be worked out and alternatives/options could be
developed for changes in the supply chain business model
in order to ensure that both the supply chain as well as
the business model are GST efficient. Some of the
options around re-engineering the supply chain would
relate to decisions on indigenous supplies vis-à-vis
imports; Intra-State vis-à-vis Inter-State procurement
manufacturing service/warehousing & stocking locations,
in-house vs contract manufacturing, direct sales vs
stock transfers etc.,
The time is therefore opportune for companies to gear up
to face the challenges as also to seize the
opportunities that the transition from the present tax
system to the dual GST has thrown up.
Source :
Business Standard,
India,
dated
05/12/2009
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