Impact of GST (Goods and Service Tax)

On
Supply Chain Structure and Operations

By
Siddarth Bhagat
1401089
PGDIE 44 B

Introduction
GST (Goods and Services Tax) is a

destination based tax on goods & services

with an input credit mechanism across the
value chain; that is taxation is only on a
value added basis
Major taxes likely to be subsumed are
CENVAT, VAT and service tax. GST would
also mean removal of the existing CST
which is payable on inter state sales; a tax
that is not allowed to be set offagainst
further taxes in the value chain

Tax Implication on Supply Chain

Operations
Pre VAT
In the Pre VAT situation, when LST (Local Sales Tax) was typically much higher than

CST (Central Sales Tax), companies responded with a Supply Chain design in such a
way so as to maximize CST movements (within the constraints of feasibility). This
meant that companies created a Warehouse structure that allowed for Stock Transfers
from Plant to the Warehouse across a State and then movement from Warehouse to
Depot/Market again across the State thereby creating the Inter State movements.Key
implications are:
The Warehouse location was not based on logistic (Transportation cost
Minimization/Service level Maximization) consideration but based on Tax efficiency;
very often the Warehouse was closer to the border of a State rather than to the serving
Markets, which would otherwise be considered sub optimal, but became feasible
because of the tax imbalance.
The goods were sent in a two step roundabout manner where Stock Transfers were

Post VAT
After the introduction of VAT in lieu of LST, because of the value

added nature of the VAT, companies moved towards all Intra State
transactions using VAT and reduced the Inter State movements so
as to avoid the CST charges which couldnt be set off.
This meant that the companies created different warehouse
locations in each State wherein Stock Transfer from the Plant
could be affected so as to increase Intra State flows.
The key implications were:
The number of warehouses were many more and the sizes were
smaller,while this could could arguably improve Service Levels,
the cost of such smaller movements into different warehouses
could offset the gains.
The smaller nature of the warehousesreduced the possibility of
creation of alternate structures of Hub and larger size trucks etc.

Post GST
GST would have significant impact on the Supply Chain

Network of companies. This is because the Tax Structure

would fundamentally move away from taxes that cannot be
set off (and hybrid situation) to one where on an All India
basis, Tax Structure would be based on value add.
This would mean that so long as there is no values add, there
would be no taxation. The impact of this would be creation of
a Supply Chain Network that would be Tax Neutral. Hence a
product that moves from Pune Plant to Vashi Warehouse to a
depot in Andheri would be charged the same total quantum of
GST irrespective of the length and location of the transfers
(assuming there is no value add in the transfers). Hence the
same product flows from Pune Plant to Jaipur Warehouse to
Andheri Depot, theGST would be the same, though the Supply
Chain cost would obviously be higher.

Implications after GST

The Supply Chain network would be Tax neutral as far as GST goes. (case

basis, there would be other taxes such as Entry tax/Octroi that would stilbe
levied)
The efficiency of Supply Chain would fundamentally only depend on the
minimization of Supply Chain cost such as Primary Freight, Secondary Freight,
CFA charges, Warehouse Fixed and Variable Cost, Depot Fixed and Variable
Cost etc.
The following considerations (not limited to these choices) for the Supply
Chain Design would be key:
Choice of Warehouse Locations, Depot Locations with respect to the Plants
and the Markets
Design of the Supply Chain such as Meshed Design vs. Hub and Spoke vs.
combinations thereof Choice of the Warehouse Capacity and Depot Capacity
Choice of Mode of transport such as Road (9 tonner vs. 15 tonner vs. 20
tonner) and Rail (Half Rake, Full Rake, 2 Point Rake) for the different linkages
Choice of Inventory and Transportation strategies such as Replenishment
cycle, Safety Stock, Milk Runs etc.

THANK YOU