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Submitted By: Arpit Shah Mohit Dhanawat Prashant Saxena Roopansh Jain
Table of Contents
Executive Summary .................................................................................................................................. 3 Supply Chain Management ....................................................................................................................... 4 Tax System................................................................................................................................................ 4 Indirect Tax in India.............................................................................................................................. 4 Goods and Service Tax ......................................................................................................................... 5 Simulation on the effect of GST on Supply Chain ................................................................................... 7 Possibilities of Tax Rate ........................................................................................................................... 8 How GST can influence the Supply Chain Management of a company ................................................... 9 Without GST/ Present Tax structure ..................................................................................................... 9 With proposed GST ............................................................................................................................ 12 Warehousing strategy-Should we change or not? ................................................................................... 15 Special Scenario Managing the Product Transfer within Internal Divisions ....................................... 17 Expected industry response to GST ........................................................................................................ 18 Conclusion .............................................................................................................................................. 19 References ............................................................................................................................................... 19
Executive Summary
Government of India is proposing to substitute the present tax system VAT and Excise with GST (Goods and service tax). There would be common tax for all goods or services being consumed or availed respectively (CGST, SGST and IGST). At present, companies have aligned their policies and operational strategies as per existing tax structure. With the change in the whole tax structure in India, many industries may have to change their supply chain strategy. Companies will try to align themselves with the change to minimize the tax or fiscal cost. Tax factors will play a role in deciding which state to set the warehouse in, what mode/route to follow for a particular state, whether to have a dealer in separate state or have a warehouse as the differential tax rates may affect these factors. A scenario analysis was done to check the impact of GST on different supply chains by comparing it to the present tax structure. With the GST in place, all the taxes might become creditable, whereas in present tax structure the CST gets cascaded in the pricing, and adds up in the cost of intermediaries. Second, most critical point is in present tax structure the goods are not taxable under interstate transfer within companys warehouse but with GST, it will also be taxable as per interstate goods and service tax at applicable rates. Both the above, changes in the taxation are crucial factors for companies to decide on their supply chain strategies. Many industries may plan to go centralized from their current decentralize mode of operation, and reduce their warehouses to eliminate the Interstate GST. We concluded that the introduction of GST in India will lead to a massive supply chain restructuring for some of the industries. It will lead to centralization of warehouses and thus reducing the number of warehouses significantly. It may have an impact on the total cost which has to be bear by customers in case of transfer of goods from one state to other. It might also lead in direct transfer of goods from manufacturer to Dealer/Customer, thus eliminating the IGST when moving the goods from one state to other.
Tax System
In India, government levies different types of taxes on different type of activities, like value added tax, service tax, excise duty, luxury tax, entertainment tax etc from production of goods to consumption of goods or services one has to go through different kind of tax regimes. Indirect Tax in India Presently, there are four types of taxes in India, 1. 2. 3. 4. Custom Duty - Custom duty is imposed on the goods imported from other country Excise Duty - Excise duty is imposed on goods manufactured in India Sales Tax - Sales tax is imposed on goods transported or sold to consumers, Service tax - Service tax is imposed on the services availed by the consumer
beyond the surcharges, octroi etc. the custom duty depends on the goods and its value, government control the excise duty and service taxes. Sales Taxes are of two types 1. Value Added Tax (VAT) Imposed on addition in value by the manufacturer at each stage, decided by state government 2. Central Sales Tax (CST) imposed on transfer of goods from one state to another state, decided by central government
Goods and Service Tax Government of India is proposing to substitute the present tax system VAT and Excise with GST (Goods and service tax). There would be common tax for all goods or services being consumed or availed respectively. The Goods and service taxes would be in three parts: 1. CGST Central Goods and Service Tax to be imposed on goods or services consumed or availed within state 2. SGST State Goods and Service Tax to be imposed on goods or services consumed or availed within state 3. IGST Interstate Goods and Service Tax to be imposed when any goods or services consumed or availed outside the state of origin
Supply Chain Management Critical Points of GST and present tax structure Excise Duty, VAT, CST, Service Tax Excise duty and VAT are charged on value added to each stage of manufacturing CST is not creditable and it get cascaded every time it is charged Inter-state goods transfer within companies warehouse doesnot attract any tax (CST)
GST (CGST, SGST, IGST) GST will be charged on value added but its scope of value addition is yet to be defined The cascading of IGST/CSGST/SGST cannot be defined as the credit policy is not available Interstate goods transfer will be liable for IGST even if it is within the company warehouse
Companys tries to minimize the tax burden by locating their warehouses and factories such that maximum tax benefit can be availed. At present, companies have aligned their policies and operational strategies as per existing tax structure. With the change in the whole tax structure in India, many industries may have to change their supply chain strategy. Companies will try to align themselves with the change to minimize the tax or fiscal cost. The restructuring decision will be involved at every stage of supply chain
The new tax is expected to reduce the number of warehouses that manufacturers are required to maintain in different states, resulting in a big increase in demand for integrated logistics solutions. Its very probable that companies will move to newer and more centralized hub and spoke distribution models. The GST will begin to make a difference to decisions about the physical supply chain, freeing executives from having to locate manufacturing bases and distribution networks with tax benefits foremost in mind and allowing them to think about operating flexibility and efficiency from the customers standpoint. As such, the GST will put domestic business leaders on an even keel with importers that do not need to pay consumption taxes.
Secondary Freight Cost is the transportation cost incurred between the warehouses and the customers Demand and supply was set constant in both scenarios and same service level was maintained through simulation.
These factors will play a role in deciding which state to set the warehouse in, what mode/route to follow for a particular state, whether to have a dealer in separate state or have a warehouse as the differential tax rates may affect these factors.
Without GST/ Present Tax structure Assumptions: Base Price Excise duty Excise cess VAT CST Profit margin 100.00 12.00% 3.00% 12.50% 12.50% 10.00%
Route One For a product manufactured and sold in the same state, the applicable taxes are Excise duty, Excise Cess and VAT. As per our assumptions, for a base price of Rs 100, an excise duty of Rs 12 is levied (12% of 100). An additional amount of 36 paise (3% of 12) are levied as excise cess on excise duty paid. The total of the three amounts to 112.36 on which a VAT of 12.50 % is imposed. Thus the total cost to the firm for supplying a product within state is the sum of the Base price, excise duty and cess and VAT. The total cost comes out to be Rs 126.41 for route 1. Route Two For a product manufactured in one state and sold in other via a dealership in other state, the applicable taxes are Excise duty, Excise Cess, CST and VAT.
As per our assumptions, for a base price of Rs 100, an excise duty of Rs 12 is levied (12% of 100). An additional amount of 36 paise (3% of 12) are levied as excise cess on excise duty paid. The total of the three amounts to 112.36 on which a CST of 12.50 % is imposed to travel the goods from one state to another. Thus the invoice paid by the dealer to the dealer is 126.41. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 126.41 is kept as profit. VAT of 12.50 % is then applied on the value achieved after addition of profit margin to the invoice paid by the dealer. Thus the total price in this case comes out to be Rs 156.43. Route Three For a product manufactured and sold in the same state and sold via a dealership, the applicable taxes are Excise duty, Excise Cess and VAT. As per our assumptions, for a base price of Rs 100, an excise duty of Rs 12 is levied (12% of 100). An additional amount of 36 paise (3% of 12) are levied as excise cess on excise duty paid. The total of the three amounts to 112.36 on which a VAT of 12.50 % is imposed to travel the goods from one state to another. Thus the invoice paid by the dealer to the dealer is 126.41. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 126.41 is kept as profit. VAT of 12.50 % is then applied on the value achieved after addition of profit margin to the invoice paid by the dealer. Thus the total price in this case comes out to be Rs 156.43. Route Four For a product manufactured and sold in other state and sold via warehouse and dealership, the applicable taxes are Excise duty, Excise Cess and VAT. As per our assumptions, for a base price of Rs 100, an excise duty of Rs 12 is levied (12% of 100). An additional amount of 36 paise (3% of 12) are levied as excise cess on excise duty paid and the good is then transferred to the warehouse in other state. The total of the three amounts to 112.36 on which a VAT of 12.50 % is imposed to travel the goods from one state to another. Thus the invoice paid by the dealer to the warehouse is 126.41. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 126.41 is kept as profit. VAT of 12.50 % is then applied on the value achieved after addition of profit margin to the invoice paid by the dealer. Thus the total price in this case comes out to be Rs 156.43.
Route -1 Basic Price: 100.00 Excise Duty 12.00 Exicse cess 0.36 112.36 VAT 14.045 Total 126.41
Route -2 Basic Price: Excise Duty Exicse cess CST Invoice to dealer Profit margin Base price by dealer VAT Total
Route -2
Route -3 100.00 12.00 0.36 112.36 14.05 126.41 12.64 139.05 17.38 156.43
Route -3
Route -4 Basic Price: Excise Duty Exicse cess STO warehouse VAT Invoice to dealer Profit margin Base price by dealer VAT Total 100.00 12.00 0.36 112.36 112.36 14.05 126.41 12.64 139.05 17.38 156.43
100.00 12.00 0.36 112.36 VAT 14.05 Invoice to dealer 126.41 Profit margin 12.64 Base price by dealer 139.05 VAT 17.38 Route -4 156.43 Total
Warehouse (Uttar Pradesh)
Dealer (HP)
Dealers (UP & Bihar)
End customer
Taxes Paid Route 1 Tax paid to govt. By factory By customer MODVAT Claimable By customer Route -3 Tax paid to govt. by factory by dealer by customer MODVAT claimable by dealer by customer Route -4 Tax paid to govt. by factory by warehouse by dealer by customer MODVAT claimable by dealer by customer
Route -2 Tax paid to govt. by factory by dealer by customer MODVAT claimable by dealer by customer Some points to be noted: 26.41 17.38 0.00 0.00 17.38
1) Route 2 and Route 3 are similar except that in case of state transfer dealer cannot claim MODVAT benefit thereby absorbing the taxes in margins. Therefore to benefit the dealers company open warehouses in different regions.
2) Route 4 is adopted against Route 2 if there are large customer in particular region to serve. It also prevents taxes and delivers better service to customer. Warehouse Stock transfer gives the opportunity to buyer to claim MODVAT tax credit. With proposed GST Assumptions Base Price Excise duty Excise Cess IGST CGST SGST Profit margin 100.00 0.00% 0.00% 12.50% 6.25% 6.25% 10.00%
Route One For a product manufactured and sold in the same state, the applicable taxes are CGST and SGST As per our assumptions, for a base price of Rs 100, a CGST and SGST of 6.25 each is levied (6.25% of 100). The total amount comes out to be 112.50. Route Two For a product manufactured in one state and sold in other via a dealership in other state, the applicable taxes are CGST, SGST and IGST. As per our assumptions, for a base price of Rs 100, an IGST of 12.50 % is imposed to travel the goods from one state to another. Thus the invoice paid by the dealer to the dealer is 112.50. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 112.50 is kept as profit. SGST and CGST of 6.25 % each is then applied on the value achieved after addition of profit margin to the invoice paid by the dealer. Thus the total price in this case comes out to be Rs 139.22. Route Three For a product manufactured and sold in the same state and sold via a dealership, the applicable taxes are CGST and SGST. As per our assumptions, for a base price of Rs 100, a CGST and SGST of 6.25 each is levied (6.25% of 100). The total invoice paid by the dealer comes out to be 112.50. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 112.50 is kept as profit. CGST and SGST of 6.25 % is then applied on the value achieved after addition of profit margin to the invoice paid by the dealer which is paid by the customer.
Supply Chain Management Thus the total price in this case comes out to be Rs 139.22. Route Four
For a product manufactured and sold in other state and sold via warehouse and dealership, the applicable taxes are SGST, IGST and CGST. As per our assumptions, for a base price of Rs 100, an IGST of 12.50 % on base price is paid to transfer the goods from factory to warehouse in other state. The total amounts to 112.50 on which a CGST and SGST of 6.25% is imposed and invoice paid by the dealer to the warehouse is 126.56. As per our assumptions, the profit margin kept by the dealer is 10%, thus 10% of 126.56 is kept as profit. CGST and SGST of 6.25 % are then applied on the value achieved after addition of profit margin to the invoice paid by the dealer. Thus the total price in this case comes out to be Rs 156.62.
Route -1 Basic Price: 100.00 Excise Duty 0.00 Exicse cess 0.00 100.00 CGST 6.25 SGST 6.25 Total Route - 112.50
100.00 0.00 0.00 100.00 IGST 12.50 CGST 0.00 SGST 0.00 Invoice to dealer 112.50 Profit margin 11.25 Base price by dealer 123.75 CSGT 7.73 SGST 7.73 Total 139.22 Route -2
Route -3 Basic Price: Excise Duty Exicse cess CGST SGST Invoice to dealer Profit margin Base price by dealer CSGT SGST Total
Route -3
Route -4 100.00 0.00 0.00 100.00 6.25 6.25 112.50 11.25 123.75 7.73 7.73 139.22 Basic Price: Excise Duty Exicse cess IGST CSGT SGST Invoice to warehouse CGST to dealer SGST to dealer Invoice to dealer Profit margin Base price by dealer CGST SGST Total 100.00 0.00 0.00 100.00 12.50 0.00 0.00 112.50 7.03 7.03 126.56 12.66 139.22 8.70 8.70 156.62
Dealer (HP)
End customer
Taxes Paid Route - 1 Tax paid to central govt. By factory By customer Indian Institute of Management Rohtak Route -3 Tax paid to central govt. By factory by dealer
6.25 0.00
MODVAT Claimable By customer Tax paid to state govt. By factory By customer MODVAT Claimable By customer
Route -2 Tax paid to central govt. By factory by dealer By customer Tax Claimable from center by dealer By customer Tax paid to state govt. By factory by dealer By customer Tax Claimable from state by dealer By customer
0.00 7.73 0.00 0.00 7.73 12.50 7.73 0.00 12.50 7.73
By customer Tax Claimable from center by dealer By customer Tax paid to state govt. By factory by dealer` By customer Tax Claimable from state by dealer By customer Route -4 Tax paid to central govt. By factory by warehouse by dealer By customer Tax Claimable from center by warehouse by dealer By customer Tax paid to state govt. By factory by warehouse by dealer By customer Tax Claimable from state by warehouse by dealer By customer
0.00 7.03 8.70 0.00 0.00 7.03 8.70 12.50 7.03 8.70 0.00 12.50 7.03 8.70
Some important notes: 1) In case of Route 2, dealer can claim tax benefit at their end and pay the differential of both CGST and SGST. It is a gain for dealer for interstate deliveries. Route 2 and Route 3 will involve similar tax idea as it involves only CGST and SGST at different state level. 2) In Route 4 the warehouse will be charged with CGST and SGST which was earlier not applicable with VAT system. It will add tax burden to company to include the warehouse in different state d further delivering the goods from warehouse to dealers and distributors.
Decentralized warehouses: 1) Many warehouse in nearby region to serve better 2) Cost of maintaining the warehouse cumulatively would be high but can be presumed to be compensated by better service and tax saving 3) Demand forecasting at individual warehouse level 4) High transportation for delivering the product to smaller warehouses from factory 5) Low transportation problems in sending the goods from warehouses to dealers/distributors Centralized warehouse: 1) One big warehouse to cover more geographical area 2) Cost of maintaining the warehouse is low as the fixed cost of maintaining many smaller warehouse would be higher 3) Demand forecasting will be central level and fluctuation and inventory management would be easier 4) High transportation for delivering the product to dealers and distributors from such big warehouses 5) Low transportation problems in sending the goods from factory to single warehouse in one region
Scenario Summary
Base Price
GST
Route 1 Route 2 Route 3 Route 4 Route 1 Route 2 Route 3 Route 4 100.00 100.00 126.41 12.36 14.05 100.00
-
100.00
-
100.00 100.00
-
100.00
-
100.00
-
Factory
Total claimable Tax paid Total non-claimable Tax paid Base Price
112.50 12.50 -
Warehouse
Total claimable Tax paid Total non-claimable Tax paid Base Price
Dealer
Total claimable Tax paid Total non-claimable Tax paid Base Price
Customer
Final Price
126.41 156.43
112.50 139.22
From the above table, we can infer that with the GST in place, all the taxes might become creditable, whereas in present tax structure the CST gets cascaded in the pricing, and adds up in the cost of intermediaries. Second, most critical point is in present tax structure the goods are not taxable under interstate transfer within companys warehouse but with GST, it will also be taxable as per interstate goods and service tax at applicable rates. Both the above, changes in the taxation are crucial factors for companies to decide on their supply chain strategies. Many industries may plan to go centralized from their current decentralize mode of operation, and reduce their warehouses to eliminate the Interstate GST. With more centralization, the focus will move towards managing lesser but bigger warehouses. This may increase in demand from central warehouse, therefore to transfer more material companies may try to increase the truck sizes such that the number of trips can be reduced or increase the number of trips. This will change the truck usage pattern, and it may influence the logistics to increase the load capacity of trucks to minimize the cost of transportation per item.
pay higher price. Therefore, companies may not change their supply chain strategy and focus more on better delivery and service response. Industry: Highly price elastic products SCM requirement low lead-time, small consumers, easy substitutes, highly price sensitive, change in demand pattern cannot be predicted Likely Attitude on GST Companies may not change their supply chain strategy in order to maintain high efficient delivery and better serve, in addition in order to maintain the prices, the companies mayhave to take the burden of additional taxes on to themselves, OR, if prices needs to be changes it may change at industry level. As the additional taxes if applied will be for the whole industry therefore the change in supply chain strategy may happen at industry level and not at company level. Reason Price elastic products are Push strategy products, they need to be filled in market and moving from decentralization to centralization may not be effective for such highly push driven products. The companies cannot afford to lose the market because of high prices or non-availability. Industry: E-commerce SCM requirement low lead-time, small consumers, easy substitutes, change in demand pattern cannot be predicted, low margin products Likely Attitude on GST there may be two possibility for such companies, either they may not be able to change their supply chain strategy in order to maintain a good and efficient delivery system or companies may change their business model itself i.e. companies may change their business model and work as interface between consumer and suppliers. Reason E-commerce is usually low margin driven industry and operating with large number of warehouses with additional tax burden may not be suitable in long run, therefore the companies may find it difficult to operate in small regional warehouse operation mode. e
Conclusion
We can conclude that the introduction of GST in India will lead to a massive supply chain restructuring for some of the industries. It will lead to centralization of warehouses and thus reducing the number of warehouses significantly. It may have an impact on the total cost, which has to be bear by customers in case of transfer of goods from one state to other. It might also lead in direct transfer of goods from manufacturer to Dealer/Customer, thus eliminating the IGST when moving the goods from one state to other.
References
1. Accenture Report 2011, Goods and Service Tax responding to an unprecedented opportunity to transform supply chain performance in India, Anurag Sckhri, Ganesan Ramachandran 2. Designing and Managing the Supply Chain, David Simchi-Levi, Philip Kaminsky, Edith Simchi-Levi, Ravi Shankar Page | 19 Indian Institute of Management Rohtak
3. Business Standard article, Companies gear up to face GST Impact, Delhi, April 15th 4. Transporter Magazine, March2012 , GST Impact on Logistics industry in India