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Supply chain in India is a key to manufacturing, automotive, pharmaceutical, and chemical, consumer goods industries. Set up of this supply chain across geographies is key to profitability of the units as there is a considerable cost involved.

While there is a business decision for the set-up of this network, differential tax structures across borders have greatly influenced not just this network, but procurement plans as well.

The advent of GST is bound to reshape this set up, and organizations will have to rethink their strategy in all these aspects.

Firstly GST is a destination based tax that is solely dependent on supply. Secondly GST aims to remove the cascading effect of taxes especially in inter-state movements. Thirdly, as it rationalizes the tax structure, costs must come down for the end consumer.

The setup of a warehouse involves several costs, and has also to meet service level agreements. In the current regime, the incidence of Central Sales Tax plays a crucial role in determining the setup. Thus identifying the “where” is strategic in nature. These help in determining direct sales versus stock transfers, in-house versus contract manufacturing and so on.

A typical supply chain will look as follows:

Supply 
Chain 
Outlet
Cost
in Rupees
Margin
in
Rupees
CST
%
CST
in
Rupees
Price
in
Rupees
Manufacturer 200 50 10 25.0 275.0
Wholesaler 275 20 10 29.5 324.5
Distributor 324.5 25 10 35.0 384.5
Retailer 384.45 35 10 41.9 461.4

The box above shows the cascading effect of Central Sales Tax which leads to a higher price of goods at the hands of the end consumer.

Supply 
Chain 
Outlet
Cost
in Rupees
Margin
in
Rupees
VAT
%
VAT
in
Rupees
Price
in
Rupees
Manufacturer 200 50 10 25.0 275.0
Wholesaler 275 20 10 4.5 299.5
Distributor 299.5 25 10 28.0 352.5
Retailer 352.45 35 10 10.8 398.2

On the other hand, in an intra-state sale, we see how the final price is lower because of the incidence of VAT, and the facility to set off tax paid during procurement against that levied at the sale point.

Central Sales Tax is not only cascading the effect of taxes down the supply chain. It is also a cumbersome process with several forms that need to maintained and submitted.

Thus firms set up several warehouses or hubs across the country in states where there is heavier consumption.

Technologically, several duplicate entities of the supply chain like these warehouses which are mere hubs across the country in states would not be technically equipped as the return on investing into these hubs was nil. Managing stocks and ledgers would be a painful manual activity – people processes reducing efficiencies and accuracy.

With the introduction of GST, the scenario of inter-state sales will also be see reduced price simply because the tax chain will remain unbroken (a part of IGST replacing CST). The need to have a hub like warehouse in every state is also eliminated; direct sales could replace stock transfers followed by subsequent sales.

What is important is to rework an optimum path in the light of elimination of several hubs and consolidation of warehouses. The existing techniques for optimization will have to be reformed so that current service levels are maintained, logistics costs are reduced without affecting lead time.

This will help reduce the overall cost of goods sold, thus entailing a lower price for consumers, and at the same time increasing profitability for firms.

Firms will have to methodically do an impact analysis, and propose a holistic solution considering people, business including procurement and technology.

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2 Comments

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  1. Ramky Prabhakar

    Great explanation Arun. Can we add video link (may be SAPTV or Youtube) to help understand purchase and sale scenarios in GST world too, this will help consultants/partners like us to convince customers how SAP is shaping GST solution.

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