Impact of GST on Supply Chain strategy and its

effect on warehousing and transportation

Monuments Men
By:-

Anand Singh
Gaurav G B
NITIE

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TABLE OF CONTENTS
1.

ABSTRACT

2.

INTRODUCTION

3.

TAXES UNDER GST

4.

SUPPLY CHAINS TO BE IMPACTED

5.

AS-IS STATE OF SUPPLY CHAIN

6.

TO-BE STATE OF SUPPLY CHAIN

11

7.

CONCLUSION

14

8.

REFERENCES

15

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1. ABSTRACT
As India prepares for a transition to the next level of logistics growth
trajectory, regulatory policies need to evolve well ahead of the introduction. It
is in this context that this paper analyzes the key fiscal as well as business
implications of the proposed GST.
With a potential to add over one percent to Indias Gross Domestic Product
(GDP), GST will not only provide an opportunity to revisit, rationalise and reengineer transportation and logistics networks in India, but will also unleash
an era of developing logistics infrastructure and taking investments to the
next level.
GST is implemented to make India a single market, transiting from an existing
origin-based tax structure to a destination-based tax structure. This will have
a strong impact on the manufacturing firm, supply chain and distribution
channel.
Warehouses are an important part in the supply chain. A warehouse placed
strategically not only improves the levels of customer service but also
reduces the burden on other supply chain elements, providing opportunities
for improving the entire distribution network. Some of the advantage of GST
are bigger consolidation of demand at warehouses reduced variation in
demand at warehouses, improved inventory management, improved demand
planning, reduction in number of echelons in supply chain, increase in truck
load utilisation, reduced cost for improving service level, reduced costs and
delays during interstate transfer of materials. GST will help consolidate the
information supply chain which in turn will sense end customer demand or
supply constraints and help synchronise activities in order to reduce costs
and quicken responses to fluctuations in demand.

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2. INTRODUCTION
The consumption tax system in India is complicated and multi-layered with
levies both at the federal and State levels. Taxes on goods are levied by the
Centre at the manufacturing level through CENVAT, on services through the
Finance Act, and on sale of goods via the Central Sales Tax Act. States levy
tax on the sale of goods independently, under their own laws. Though some
degree of uniformity had been arrived at after the introduction of the Value
Added Tax, differences do persist.
Goods and Services Tax (GST) is a broad based, single, comprehensive tax
levied on goods and services consumed in an economy. GST is levied at every
stage of the production-distribution chain with applicable set-offs in respect of
the tax remitted at previous stages. It is basically a tax on final consumption.
To put at a single place, GST may be defined as a tax on goods and services,
which is levied at each point of sale or provision of service, in which, at the time
of sale of goods or providing the services, the seller or service provider may
claim the input credit of tax which he has paid while purchasing the goods or
procuring the service.
It can also be seen as the evolution of tax regime, from the current complex
and cascading structure into a unified value added system. GST would be
levied by the centre as well as state, simultaneously. The central GST is known
as CGST whereas that of the state is known as SGST. Under the proposed
GST, all essential features will be same under the CGST and SGST, across all
states.
If adopted and implemented in its true spirit, GST may neutralize the existing
problem of taxes being levied on top of taxes. For instance, when a shoe
company produces a pair of shoes, the Central Government charges an excise
duty on them as they leave the factory. At the retail level, the state where the
outlet is located, charges VAT (different states charge different rates of VAT)
without giving credit on the excise duty levied earlier (the state tax is levied on
top of a central tax). In the GST system, both central and state taxes may be
collected at the point of sale. Both components (the central and state GST)
may be charged on the manufacturing cost.

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Global implementation of GST

More than 140 countries have introduced GST in some form. It has been a part
of the tax landscape in Europe for the past 50 years and is fast becoming the
preferred form of indirect tax in the Asia Pacific region. It is interesting to note
that there are over 40 models of GST currently in force, each with its own
peculiarities. While countries such as Singapore and New Zealand tax virtually
everything at a single rate, Indonesia has five positive rates, a zero rate and
over 30 categories of exemptions.
When the GST was introduced in New Zealand in 1987, it yielded revenues
that were 45 per cent higher than anticipated, in large part due to improved
compliance. Its more neutral and efficient structure could yield significant
dividends to the economy in increased output and productivity. The GST in
Canada replaced the federal manufacturers sales tax which was then levied
at the rate of 13 per cent and was similar in design and structure as the
CENVAT in India. It is estimated that this replacement resulted in an increase
in potential GDP by 1.4 per cent.

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3. TAXES UNDER GST

GST is supposed to replace the following taxes:Central Taxes
1. Central Excise Duty
2. Service Tax
3. Additional Customs Duty
4. Surcharge and Cess
State Taxes
1. VAT/Sales Tax
2. Entertainment Tax
3. Entry Tax (not in lieu of Octroi)
4. Other Taxes & Duties (includes Luxury Tax, Taxes on Lottery, betting and
gambling, and all ceases and surcharges by States)
The current tax structure can be classified into three categories:

Central indirect tax: Custom duty, Central excise duty, Central service tax
State indirect tax: Value added tax (VAT), entry tax, luxury tax,
entertainment tax etc Local tax: Octroi and other entry tax
Highlights of the proposed GST tax structure are:

Dual GST for centre and states, Integrated GST (IGST) on interstate
transactions
Free credit flow-No cross credit for Central GST (CGST) & State GST
(SGST)
Refund of unutilised accumulated ITC (income tax credit)

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4. SUPPLY CHAINS TO BE IMPACTED

In any supply chain, the different costs involved in delivering the product to end
consumer are1. Material Cost
2. Labor & Overhead
3. Capital Cost
4. Inventory Carrying Cost
5. Cost of warehousing
6. Cost of transportation
7. Taxes & duties
Other than the prime cost (direct material and labor) and overheads, major
chunk of the cost emanates from the costs of warehousing and transportation.
Elimination of local tax considerations from our equations provides us the
opportunity to eliminate the sub-optimality in our systems, and the ensuing
consolidation has the potential to save millions of dollars for the companies
which possess even reasonable preparedness to overcome the teething
troubles. In traditional supply chain fulfilment models, the product passes
through multiple warehouses before finally being delivered to end consumer,
these multiple locations can be replaced by lesser number of centralised
warehouses.
Thus, the time has come for India to have Hub-Spoke models of supply
chain. This consolidation reduces the amount of inventories required to
maintain high service levels (say 95% or above), reduces the duplication of
orders from the thousands of order points to few central locations, reduces
transportation costs as we can explore FCL and FTL rather than part loads,
less inventory carrying costs and lesser capital costs and investment. Also,
this makes the supply chain amenable to deployment of large, expensive
software and monitoring systems which propose to make tracking and
accountability easy. The effectiveness of Vendor Managed Inventory or VMI
is yet to be seen. Again, todays tax structure doesnt allow storage of
customised products, meant for specific customers to be delivered through
VMIs. To design these models and implement them successfully, one
requires expertise in a multitude of disciplines and techniques like network
design and optimisation, warehousing, logistics, inventory management,
supplier rationalisation, taxation and an understanding different on the
different elements of Total Cost of Ownership (TCO). Moreover, this
diagnostic, design and implementation requires you to partner with an
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organisation with the capability to understand the inherent differences in the

ways companies operate, their relationships with elements of the value chain
and the pace at which they can segue form an older system to the new.
The biggest challenge for manufacturing industry is to procure raw material at
competitive prices. Most of the time when raw material supplier is located in a
different state, company prefers to buy locally as procuring material from other
state would attract state entry tax and state excise which will increase the unit
cost. So we believe with the implementation of GST the barrier of interstate
transfer will be removed and companies can freely trade at best prices. This
will also make the market competitive as local suppliers have to match the
prices given by suppliers of other states.
Another challenge faced by manufacturing industry is outbound logistics. In
India manufacturing industry is located as clusters. So truck need to travel the
length and breadth of country to carry product to different parts. The time taken
for this process ( lead time ) is very high because as the trucks move from one
state to another they need to produce papers of material transfer and pay local
state taxes accordingly. It is a very time consuming activity with no value
addition. With the implementation of GST, companies will be able to reduce
lead time to a great extent and hence product availability in market will improve
Positively impacted supply chains
Products which had high taxes and lower sizes, hence multiple warehouses
had to be created.
Negatively impacted supply chains
Products which had lower taxes and had consolidated supply bases.

Impact of Exclusion of Petroleum products from GST

The prices of petroleum products vary across the country, with states imposing
differing VAT and other taxes under their jurisdiction over and above the central
taxes. It is proposed that the petroleum products will be out of the GST net,
which means this problem of differing prices across states will remain. This will
have larger implications for the transportation service providers as the fuel
costs the largest chunk about 55%-60% of the total costs.

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5. AS-IS STATE OF SUPPLY CHAIN

Today, in the current multiple tax system the total tax can add up to 30% to the
manufactured cost. Warehousing and logistics strategy of organisations are
governed mostly by the tax considerations of states. As bulk transfer of goods
doesnt incur taxes, organisations create small warehouses in almost all the
states to cater to local demands. Goods are delivered to these local
warehouses from the manufacturing plants. The network typically consists of
carry and forward agents to the distributors, from the distributors to the retailers
before the material actually reaches the customers.
This poses several challenges in the supply chain: Multiple storage points means larger inventory to be handled.
Segregated fulfilment points make companies vulnerable during demand
deviation.
They need to maintain larger safety stocks to counter any supply
impediments.
Warehouses face productivity challenges owing to technological issues as
technology upgrade across all warehouses is not feasible.
Multiple supply chain points increase the cost further, making the end product
costly and sometimes impacting the margins as well.
Besides these tax implications, complex state-wise tax structures have serious
repercussions on the manufacturers. Inventory and distribution decisions are
based on tax avoidance rather than operational efficiency. Accordingly, most
manufacturers maintain warehouses in different states to evidence movement
of goods from one warehouse to another to save on the CST. Also, quite a few
entities set up warehouses in locations like Pondicherry or Daman, often
impractical from a distribution point of view, as the CST rate at such locations
were previously lower than the rates prevalent in other states.
Typically, most large consumer durables or FMCG companies in India operate
with 25 to 50 warehouses all over India, which is a very high number compared
to developed economies (less than 5-8) or even developing countries (less
than 10-15) with similar geographical expanse. This has severe implications on
cost structure and operational efficiency levels, which is ultimately borne by the
end consumer either in terms of cost-quality trade-offs.
More sum total space & inventory requirement: It is estimated that if tax
avoidance is not a factor for deciding distribution network, the total
warehouse space can be reduced by 20-50 per cent immediately.
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 Small & inefficient warehouses: Given the large spread of 4,000-10,000 sq ft

warehouses, the average size of a warehouse has remained small causing
duplication of overheads and making it unviable for owners and operators to
introduce racking or automation. According to a broad estimate, scale
economies start to positively affect warehouses only when they are larger
than 30,000 sq. ft.
Distribution cost and inefficiencies: There are significant cost and inefficiency
implications of running a distribution network over a spread of 25-50
warehouses in terms of smaller loads, smaller trucks, and state boundaries
being the determinant of transportation routes.
Other Costs: High cost ERP linkages throughout the warehousing network to
ensure real-time visibility of inventory result in higher IT costs. Further,
multiple handling across the various layers of distribution and multi-layered
compliance requirements result in higher material handling and compliance
costs.

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6. TO-BE STATE OF SUPPLY CHAIN

GST would eliminate charges on interstate transactions, which will facilitate
consolidation of vendors and suppliers. This will eliminate having a warehouse
to cater to local needs in every state to avoid CST and the associated
paperwork. This will facilitate in reducing a redundant level of warehousing in
the supply chain.
Organisations will be able to explore different distribution models such as
setting up mother warehouses and regional distribution hubs and possibly do
away with the C&F and distributor based models currently adopted. This means
the logistics and distribution models which are currently governed by tax
considerations will transform into avenues to create competitive advantage.
GST will help the firms in the following ways:

Reduction in the numbers of warehouses.

Improved efficiencies with possibility of technological sophistication.
Better control and efficient information flow.
Reduction in inventory due to demand consolidation.
Lesser number of stocking points and stock outs.
Economies of scale will help firms reduce capital deployed in the business.
Increased lot sizes making way for more efficient bigger trucks.

Location of Warehouses:
The warehouses location will be factored considering demand regions,
inbound costs, land expenses, labor and other cost factors. Thus the supply
chains will move towards a hub and spoke model. The hub will be positioned
closer to consumption regions.
For example, Coimbatore can emerge as a hub considering its proximity to
consumption regions like Tamilnadu and Kerala.
Gravity location models can be appropriate for this scenario. Gravity location
models are used to find locations that minimize the cost of cost of transferring
materials from plants and stocks to various dealers.
Demand Consolidation at Warehouses:
The aggregation of demand at warehouses will result in bigger warehouses.
Significant investments will be made to adopt scientific warehouse
management principles. The present warehouse scenario in India involves a
lot of manual work. The bigger warehouses will force companies to go lean
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and bring in technology. Palletization will receive a huge boost, since the
advantages of it is truly felt with large quantities.
Lower inventory costs because of aggregation. Benefits of aggregation are
highest for low demand, high value items. For high demand items, or items
that are pushed at a faster pace, the warehouses can double up as cross
dock points.
Demand variability also is reduced due to lower risk pooling. Demand
variability also has a huge impact on cost; the larger the variability, the more
safety stock needed.
Demand planning improvements
The consolidation of warehouses will result in a less fragmented IT systems
making supply chain systems integrated and visible. Companies can now focus
on forecasting models that sit in at warehouse level. This would result in an
improved forecast accuracy. The companies can also focus on the new
multivariate models factoring in causals that are unique to different regions.
This would help in demand sensing activities thereby making supply chain
more responsive. Finally, all the improvements in the planning process would
result in less anomalies between primary sale and secondary sale of various
firms.
Logistics re-arrangement:
Post GST India can be seen as one large geography with no state boundaries.
This will allow aggregation of warehouses, every 4-6 state level warehouses
can be turned into one large regional warehouse. This will make use of the hub
and spoke distribution model that offers proven cost and operational benefits.
Larger scale will also being much needed investment into technological
sophistication of the warehouses for improved productivity and efficiency. 3PL
service providers will have reasons to invest in scale, technology and have
service focus to align their services as per the needs of their customers.
The advent of GST will also spur the growth of Uber like revolution in
transportation sector. Technology based truck aggregators would significantly
affect the availability and reliability of trucks.
Extensive use of technology would also enhance the visibility of logistics
providers. Visibility would help companies to provide the exact dates of delivery
thereby leading to improved service levels. Real time tracking of the trucks
would help in better decision making. It would also abate pilferage activities.

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Tax-Credits
Manufacturers will have input tax credits of all inputs, irrespective of the place
of purchase, from a registered dealer for setting off the output tax liability on
the sale of their finished products. Distributors will be able to pass on their
share of taxes to the customer. This would remove cascading of taxes and
reduce the cost of doing business.
Cash Flow Benefits
Dealers and distributors will have cash flow benefits as they will collect the tax
from their customers at the time of sale. But, they will remit the same to the
government only at the end of the month or the quarter, when they file their
returns. This extra cash flow will help them grow their business to achieve scale
or make its operations more efficient.
Lower Prices
In the longer run the manufacturers and distributors are expected to pass on
their benefits to the end customer making the products slightly less costly.

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7. CONCLUSION
As India prepares for a transition to the next level of logistics growth
trajectory, regulatory policies need to evolve well ahead of the introduction.
The below table summarizes the key business implications that may accrue
to the wider industry owing to increased organization in post-GST scenario:
Supply chain re-engineering
Many service providers and end users would revamp their supply chains,
realigning the locations of warehouses, corridors used and transportation
options exercised, thus generating tremendous business opportunities for
Fourth-party Logistics (4PL) firms specializing in supply chain re- engineering
as well as for providers of network optimization tools such as Transportation
Management Systems (TMS).
Transportation
Re-organized countrywide networks would decrease cost of primary freight
since warehousing locations are likely to be placed closer to
manufacturing/import/export locations. In contrast, this would increase
secondary freight due to fewer warehouses.
Automation
Efficient handling of larger volumes per warehouse (owing to new/
consolidated warehousing) would command increased reliance on
automation/ technology applications such as Put-to-Light, Pick-to-Light,
Enterprise Resource Planning (ERP) and Warehouse Management System
(WMS).
Undeniably, GST will be pivotal in rationalizing the indirect tax procedures.
While it is imperative for policymakers to further accelerate the deliberations
ensuring early implementation, other stakeholders such as service providers,
users and industry bodies too need to collaboratively prepare their road map
in advance.

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8. REFERENCES
1. Valcon. Optimising FMCG supply chain network for GST.
2. Anurag Sekhri & Ganeshan Ramachandran. (2011). Goods and Service
Tax: Responding to an unprecedented opportunity to transform supply chain
performance in India. Accenture.
3. Sunil Chopra, Peter Meindl & D.V. Kalra.(2013).Supply Chain
Management.Pearson
4. Chandrasekar Ranganathan & Jiten Jain. (2012). Indias Goods and
Service Tax: the Case for Distribution Network Redesign. Cognizant.
5. Mandar Shivsavarkar.(2015).GST: The Tax and Other Greater Implications
for Supply Chain Networks.
6. Gagan Seskaria.(n.d).India after GST.Tuscan Ventures.
7. Rohit Shukla & Jimmy Thomas.(n.d).Looking Ahead The Big Opportunity
for Network Design GST Introduction in India.ITC Infotech.
8. Siddharth Paradkar.(2011). GST: An Opportunity to reassess your
Supply Chain. Tata Strategic Management Group.
9. Ravi Shankar,Philip Kaminsky,David Simchi-Levi &Edith SimchiLevi.(2013).Designing and Managing the Supply Chain.McGraw Hill.

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