The main objective of this report is to provide a holistic view of the implication of Goods and Service Tax (GST) on Supply Chain Management. It describes how the GST has impacted various Supply chain activities.
The report effectively contrasts the practices that used to exist in the pre-GST regime and the changes to which the current Supply Chain Management is moving after the introduction of GST in India. It also highlights the impacts on The Procurement, Transportation, Logistics, Warehousing, Inventory Management, Manufacturing and Retail activities of Supply chain.
Goods and Services Tax (GST)
The Goods and Service Tax Act got passed in the Indian Parliament on March 29th, 2017 and this Act came into effect on July 1st, 2017 in India. GST is defined as an Indirect Tax which has replaced many Indirect Taxes that existed in India for long. Goods & Services Tax Law in India is also termed as a comprehensive one, multi-staged and destination-based tax that is imposed on each and every value addition. Multi-stage means that there are multiple levels an item goes through along its supply chain i.e. from manufacturer to retailer to the consumer and since GST is levied on each of these stages, this fact makes it a multi-stage tax. GST is levied on value additions i.e. the monetary value is added at each stage to achieve the final sale to the end customer. Since it is Destination based, GST is levied at the point of consumption. GST comprises of three taxes that are applicable under its umbrella:
- CGST: This is collected by the Central Government on an intra-state sale.
- SGST: This is collected by the State Government on an intra-state sale.
- IGST: This is collected by the Central Government for inter-state sale.
GST has primarily removed the Cascading effect that existed on the sale of goods and services. Eradication of cascading effect which is also termed as tax on tax, cost of goods has significant impact after the GST. Additionally as compared to earlier tax system, GST is technologically driven as all the activities like registration, return filing, application for refund, response to notice etc. needs to be done on online platform on the GST Portal, this in turn speeds up the processes making it faster and more efficient. There are certain Non-GST goods such as:
- Petroleum crude
- High-speed diesel
- Motor spirit/ Petrol;
- Natural gas
- Aviation turbine fuel
- Alcoholic liquor for human consumption.
CGST, SGST, and IGST has replaced all the taxes that existed in pre-GST era like Central Excise Duty, Duties of Excise, Additional Duties of Excise, Additional Duties of Customs, Special Additional Duty of Customs, State VAT, Purchase Tax, Central Sales Tax, Cess, Luxury Tax, Entry Tax, Entertainment Tax, Taxes on advertisements, Taxes on lotteries, betting and gambling.
Supply Chain Management (SCM)
A supply chain is an interlinked network of individuals, organizations, resources, processes, activities, and technologies that are involved in the manufacture and sale of a product or service. A supply chain starts with the procurement process and the delivery of raw materials from a supplier to a manufacturer and ends with the delivery of the finished product or service to the end consumer. Supply chain management is the management of the flow of goods and services and considers all processes that transform raw materials into final products that meet consumer expectations and needs.
The GST Era promises to make Indian products competitive in domestic as well as International markets and eventually leading to give a boost in economic growth of the country. The publication by Girish Gang in 2014, titled “Basic concepts and features of GST in India” published in International Journal of Scientific Research and Management explains the features of GST. An Article published in Journal of Production Research and Management by Amit Chandak titled ‘How “Goods and Service Tax” will Impact Logistics and supply chain Industry in India’, highlights that GST is a comprehensive tax and its impact is a comprehensive one too, it highlights the impacts on various supply chain activities like procurement, transportation etc. and discusses major changes after GST implementation as well as the bookkeeping activities. The article “Supply Chain in India: On the Brink of a Revolution” written by Roshini Singh at India Briefing highlights the changes in supply chain after the GST clearly stating that its growing regional integration and investor’s confidence. An Article by Jasjit Sethi at CIO Review highlights the 5 forces of GST model on Supply chain and proposes the changes that will be imminent and matches the changes with the requirements in terms of infrastructure, process, people and technology. Moreover more thoughtful insights have been gained from The Economic Survey 2017, 2018. Overall all these publications and articles along with other articles as well have assisted to be foundations of this report.
This report is based on research from secondary data sources like Journals, Articles, Publications, Reports, News Journals, and Media Reports. All the data from the secondary sources is based on credible sources and is the review and overview of all the sources. This also included a thorough background research about GST and features of GST and getting an insight of the Supply chain management dependency on taxation structure of country and using content analysis techniques to come to a conclusion of how the two things link on the basis of research from above sources.
Analysis And Findings
Effect Of GSTt On Whole Supply Chain
The practices before the GST used to give less weightage to operational efficiencies because the main focus used to be how to reduce the state level taxes for sourcing and distribution in Supply chain. Their options would always revolve around the trade-off between Interstate or Intrastate procurement of goods, In-house manufacturing and contractual manufacturing, direct sales vs stock transfers etc. Adding on to that they also had to bear a variety of taxes like VAT, Entry tax, Service tax, Central Sales Tax etc. which added on to a lot of problems. Primary advantages that India possesses as a low cost manufacturing base used to get nullified due to the taxation structure.
The introduction of a unified system of GST is beginning to simplify the whole regime to a very great extent. By removing state taxes that had a cascading effect, the logistics companies are being encouraged to aggregate their warehouses instead of the old practice of opening one in each state to avoid Central Tax. This brings the full cost of the product down because the inventory and inventory carrying cost gets reduced which in turn affects the final cost of the product bringing the selling price down. The saved cost can be used by companies to further improve serviceability.
After the implementation of GST, the design of the supply chain is now based on the customer service and logistics cost. Smaller warehouses earlier being used can now be merged with bigger warehouses eventually solving the space problem by optimal utilization. Moreover with this the demand forecasting process can be made much robust, accurate and flexible.
Further benefits enjoyed by the companies are:
- Hassle-free sourcing of raw materials from different states.
- Better price options.
- Improved forecasting process and Inventory Management.
- Capacity Expansion and space optimization.
- Flexibility in manufacturing.
[bookmark: _Toc6750859]EFFECT OF GST ON PROCUREMENT PROCESS
The cost of Raw materials constitute a major part of the cost of the product and most of the companies try to minimize the procurement cost because it can have a significant impact. Earlier there was no policy of tax credit for inter-state procurement in the tax form but with introduction of GST, cross utilization of Input Tax Credit (ITC) is allowed in Interstate supply of goods, moreover the additional amount given as customs duty in the import of goods is brought to end by GST. As a result inter-state sales transactions become tax neutral making the processes easier. As a result many decision making questions like Inter vs Intra procurement of goods, consolidation of suppliers, choice of Import vs Local raw material vendor does not require much emphasis.
With this the procurement strategy has moved from taxation focus to focus on time and quality with a shift from producer state tax focus to consumer state tax focus along with the redesigning of specific processes.
Effect Of GST On Freight And Transportation
In the pre-GST era most companies being highly cost conscious tended to trade off future efficiency for current cost which reduced the scope of the usage of professionally managed fleets. With the advent of GST there are new range of possibilities for them:
- There will be a greater role for professional 3rd Party Logistics Professionals which can bring about much needed consolidation and expertise into the freight and transportation segment.
- GST can also reduce the time wastage at the interstate borders which in turn will be helpful in reducing transit and lead time.
- Since the interstate transactions are tax free in post-GST era, Replenishments can be made quickly from other states and hence reducing the average Inventory.
- Scope of Cross docking techniques is definitely increasing.
In the Pre-GST era, the transportation was based on the Central Sales Tax and varied state value added taxes. But in the post-GST era, the tax is levied at the central level and the state value added taxes does not have any impact. The tax rates are uniform across all the borders and state boundaries are no longer the parameter for deciding the routes.
In post GST era, the location of warehouses and their transportation networks is eventually turning out to be critical because the infrastructure for rail, road or multimodal strategy needs to be strong which requires well in advance planning to build an agile, efficient and futuristic and sustainable supply chain model. GST is enabling the warehouses to be larger in terms of capacity, with this the transportation lot sizes automatically increase, resulting in the usage of larger and more efficient trucks.
Effect Of GST In 3PL And 4PL Logistics
With the effect of GST, there is a bigger chance for Third Party logistics service providers to enter the market. Third Party logistics service providers can manage these bigger routes as in India covering north to South and make delivery process accurate and efficient. The 3PL logistics firms are constantly transforming from traditional service delivery systems to sophistically integrated and hi-tech service providers competing to meet the service demands. The focus of supply chain management is shifting from avoiding tax to reducing overall supply chain costs and asset returns, while developing the core competencies and creating customer centric network structures. The share of 3PL, 4PL providers rise further. The most important thing is that with GST, logistics sector has got infrastructure status which will create tremendous growth.
Opportunities in various supply chains is as below:
- The infrastructure of logistics is gaining importance over the location of the plant under GST regime. New opportunities for outsourcing are being created in services like carrier services and forwarder services.
- In the post GST regime, the sales and distribution models of the firms is undergoing change which is opening new opportunities in warehouse management and distribution operations leading to increase in outsourcing.
- In the aftermarket, customer service will shortly drive outsourcing in claims management as a value added service.
Effect Of GST On Inventory Management And Warehouse
In the GST regime, logistics companies can have one central warehouse or can go for warehouses at specific locations or can even adopt the unique and efficient hub and spoke model. With one country one tax, companies will have the ability to achieve cost reduction in their operations and in turn can transfer this cost benefit to the end consumer in the supply chain. Moreover, Companies can now consolidate the stock at their warehouses and demand fluctuations at a particular warehouse is also reduced to an extent. This in turn improves demand planning and results in an improved inventory management.
GST can help the Decision Makers or the top management in making the decision process much easier regarding the Warehouse and Inventory management policies. Some of these decisions may include:
- Decisions regarding planning of Warehouse Locations and Depot Locations considering the existing Plants and the markets locations and subsequent demands.
- Choice of the Warehouse Capacity and Depot Capacity which will make the planning of Safety level Stock and Reorder points much clearly visible.
- Decision Making related to decision of Replenishment cycle, Safety Stock, Milk Runs which are considered the inventory etc.
- No. of Distribution centres can be reduced and service level can be improved due to flexibility in interstate goods movement.
Big Scale regional logistics park can be constructed now to revamp the logistics infrastructure with latest technology. It increases the possible to combine with other players in stocking the products. Hence the holding costs will reduce to a greater extent. Larger warehouses would make investments into ERP and automation systems used for racking goods making it more meaningful and financially prudent.
Effect Of GST On Manufacturing Sector
GST is helping create numerous possibilities for the manufacturing sector in the following ways:
- There will be extended flexibility in vendor selection process, as the location of vendor will no longer be a constraint as it used to be before.
- Discontinuation of all area based excise exemptions and SEZ related exemptions.
- Auto component manufacturers setting up production units close to OEM plants for VAT credit chain can now be avoided after GST.
- Tax incentives will be provided equally in all states, as result new plants can be opened in any of the states which will boost up employment and decrease polarization.
- Stocking of Pharma goods at Union territories can now be avoided after GST. Initially, due to Tax exemptions, Pharma companies were stocking their products in Union territories and in SEZs.
Effect Of GST On Retail / FMCG Sectors
Over the years FMCG companies have tackled the old tax regime by developing a chain of Clearing & Forwarding agencies (C&FA agents) in each state. Goods were transferred to the C&FA without a title transfer thereby avoiding the incidence of Central Sales Tax. But as a fact it is also true that stock movement to smaller distributors is also difficult from long distances. For instance if we consider UP, considering the large size of the State, most FMCG companies would need to develop 3 or 4 C&FA’s to cover the state effectively especially if they are trying to covering smaller markets.
- Larger warehouses would make investments into automation, racking systems and ERP systems will prove to be a prudent choice. For larger warehouses, transportation will also become more efficient and cost effective with the use of larger vehicles for stock replenishment.
- This will help ensure visibility over the levels and make it easier to integrate processes for sharing data such as demand changes, current inventories, optimal transportation routes, etc.
- After GST C&FAs can now become bona fide third-party logistics providers. Moreover, customers’ demands for more value added services will boost the adoption rate of technology solutions such as warehouse management systems and track-and-trace offerings.
- There will be flexibility of differential pricing policy making it possible that the numbers of C&FA’s may come down to certain level. For example if interstate servicing of distributors has not got tax implications, a C&FA at Ghaziabad may be strategically be used to service both Delhi and Uttarakhand locations in addition to UP West circle.
Effect Of Exclusion Of Products From GST
With the introduction of GST, the State’s authority for levying State taxes and exercise duties has ended and has caused an impact on state revenues. To avoid the situation of State revenues getting severely impacted, some products like Tobacco, Alcohol for human consumption and Petroleum products etc. have been kept out of GST bracket. The effect of keeping petroleum products out of GST can be seen clearly that it is not benefitting the transportation costs of companies, instead of reducing it, it is adding up to the costs and moreover it is defeating the sole purpose of implementation of GST.
There is definitely a big impact that the GST is leaving on the Supply chain Management. Including Tax reforms and imparting infrastructure status to Logistics, the next level of logistics are evolving in India and the corresponding regulatory policies has to be taken to have a positive and expected impact. Furthermore, GST opens a plethora of opportunities for the growing Supply Chains to have a greater impact.
The following are the critical business implications post GST implementation:
The skill set requirement and training of the existing workforce to comply with the new services will pose a challenge. Workforce will now be able to become more customer centric improving the service level of the company and its operations to optimally meet the customer demands.
- Consolidation and Outsourcing: Presence of organized, planned and efficient players may increase the possibility of consolidation and also improve the scope for 3PL and 4PL logistic operations enabling the companies to focus on core competencies rather than diversifying in unrelated business.
- Re-engineering of Supply Chain: Many of the companies and service providers have started or are in process of redesigning their supply chains along with realigning their warehouses and logistics network which opens a host of opportunities for 3PL and 4PL logistics partner and providers.
- Transportation: Primary freight and transportation costs are definitely bound to come down due to removal of state limits but the secondary costs may increase due to aggregation of warehouses to bigger warehouses.
Aggregation of warehouses will lead to bigger warehouses which will be served better by automation all around using state of the art technologies to reap long term benefits. Investing in automation and Warehouse Management Systems (WMS), along with SCMS (Supply Chain Management System) will prove to be more meaningful due to increase in scale.
- Girish Gang-2014- Basic concepts and features of GST in India- International Journal of Scientific Research and Management- vol. 2 ISSUE 2 PP 542-549
- V.Jothi Francina, Dr.K.Selvavinayagam, R.K.Pradeep- Impact Of GST On Indian Logistics Sector – International Journal of Innovative Research in Management Studies (IJIRMS) – Volume 2, Issue 8, September 2017. PP.18-23.
- AMIT CHANDAK- How “Goods and Service Tax” will Impact Logistics and supply chain Industry in India – Journal of Production Research & Management- Vol 8, No 2 (2018)