To say that Indias tax regime has a significant impact on supply chain design is an understatement.

Transaction taxes (import/entry, manufacture and sale of goods and provision/receipt of services) have a direct and tangible impact on the cost of goods or services. The taxation structure in India is complex, with products typically being taxed twice: once by the central government and then by the respective state governments The Central Sales Tax (CST) effectively encouraged many companies to operate a warehouse in each state rather than pay CST while shipping to customers or stores across state boundaries. Excise Duty, a structure of selective regional exemption, complicates logistics design by creating a skewed manufacturing footprint in India. Companies are likely to resort to deploying production operations in regions which offer exemptions to excise duty in spite of incurring higher logistics costs, time-tomarket and working capital. Further, the impact of varying Value Added Tax (VAT) structure in different states, customs exemptions in Special Economic Zones (SEZ), Service Tax and corporate tax make supply chain design and optimization all the more challenging. In transportation and warehousing, CST, VAT and Octroi play an important role. Modeling CST, a tax on inter-state movement of goods, requires knowledge of source and destination locations and whether a lane is inter-state or intra-state. In order to overcome this tax, manufacturers typically move goods to a warehouse in each state as internal stock transfer and sales that take place are then shown as intra-state transactions. However, the impending phase-out of CST by March 31, 2010 would enable shift to centralized distribution networks. Since the Indian government is moving towards a uniform VAT across all states, ideally it should not have an impact on the future supply chain footprint. Octroi, a tax levied on entry of goods into a town or city, forces manufacturers to locate warehouses outside city limits and move the goods into the city only when actual sales take place (to avoid paying taxes on inventory inside city limits). Thus, Octroi may lead to addition of a tier in the supply chain and consequently higher costs. However, Octroi has been phased out in most Indian states. Effect of GST on Network Models Rationalization of excise duty rates and the expected implementation of Goods and Services Tax (GST) could significantly tilt the cost-benefit equation of the manufacturing location decision for certain firms. For instance, for products with an MRP of Rs 100 and raw material costs of Rs 40 the net excise payable (assumed at central GST rate of 8% and discounting recoverable excise paid on raw material) would be ~Rs.1.60. Factoring in inbound and outbound logistics costs, excise exemption benefits might be overridden by logistical efficiency criteria, compelling firms to rethink their manufacturing and distribution strategy.

Distribution networks would shift towards the interstate sale model, eliminating the need for C&FAs and warehouses in each state. Distribution networks would need to be redesigned to minimize total supply chain costs (primary & secondary logistics, warehousing and inventory holding costs) while maintaining service levels. Getting ready for GST Impact Assessment of GST must be studied on the following areas: Mapping the impact of GST on supply chain/business/margins Review of tax clauses of existing contracts and new contracts Identification of key decision areas - Indigenous procurement vs Imports - Manufacturing locations - Distributor/dealer networks and margins - Direct sales vs stock transfers - Warehouse & stocking points The proposed Goods and Services Tax (GST), which is slated to be introduced by the Government of India from April 2010, is a part of the tax reforms aimed at putting in place an efficient and harmonized consumption tax system in the country, in opposition to, and replacing the multiple taxes currently in place. It is also supposed to bring an end to distortions of differential treatments to manufacturing and service sector. It would lead to an abolition of taxes such as Octroi, Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services and multiple taxation in the country. GST will facilitate seamless credit across the entire supply chain and across all states under a common tax base. The dual GST model proposed for India comprises of Central GST and State GST being administered simultaneously on supply of goods and services. The introduction of GST in India would mean that manufactures will now base their logistics decisions on operational efficiency instead of tax optimization. It will enable manufacturers and 3PLs to set-up and position their warehouses and distribution channels based on the considerations of time, cost and logic, in contrast to the present when in order to save on Central Sales Tax (CST), manufacturers had to maintain warehouses at multiple locations to show movement of goods from one warehouse to another. GST will also have a direct positive impact on the business of logistics providers since manufacturers will now be encouraged to outsource their logistics and supply chain operations. The Governments proposed initiative of providing tax benefits to companies investing in warehousing for agricultural produce or in cold chain infrastructure is a positive move, being welcomed by the Logistics industry. This will result in an exponential growth of warehousing business, as well as fuel the faster growth of the entire supply chain and logistics sector.

Organizations have to restructure their supply chain strategy to overlook tax boundaries and will be able to position their warehouses and distribution networks, more focused on cost and time. To stay competitive, companies should be ready with their new supply chain strategy post GST - with details of an optimal network structure and the steps that needs to be taken to get there. "It will be a significant turning point for the logistics market in India. Demand will sky-rocket and the costs to enter the market for foreign companies will fall significantly, as the footprint needed will shrink. The need for time- and daydefinite secure services will explode, and that will drive the maturing of the India market and the consolidation of the logistics sector." The current tangled web of national, state and local taxes discourages the development of national distribution systems in India and operators say a GST would enable shippers to implement more modern warehousing and supply chain solutions, helping drive domestic and international trade. Vijay Kelkar, chairman of Indias Finance Commission, said an effective GST would push up the countrys growth rate by an additional 2-2.5% and drive exports 10-14%, by eliminating barriers to trade. Oscar de Bok, South Asia & Indo-China senior VP for DHL Supply Chain, said the GST would enable shippers to migrate from inefficient systems using more than 30 stock points. By operating from just four or five distribution centres covering the whole country, tremendous savings would be generated if intermodal infrastructure was also built up, he said.

Foreign companies entering the market will only need four national warehouses instead of 30 to cover the whole country. "Quality will rise, there will be less damages and other costs - the supply chain management business will be simpler." Currently, a central sales tax (CST) is levied on the inter-state sale transactions of goods. "With the abolition of CST, trade boundaries between states will not exist and companies can consolidate supply chains."This could really see hub-and-spoke strategies take off, focused on central locations such as Nagpur." Many countries in the world have a single unified GST system i.e. a single tax applicable throughout the country. However, in federal countries like Brazil and Canada, a dual GST system is prevalent whereby GST is levied by both the federal and state or provincial governments. In India, a dual GST is proposed whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services. The GST is expected to foster increased efficiencies in the economic system thereby lowering the cost of supply of goods and services. Further, in the Indian context, there is an expectation that the aggregate incidence of the dual GST will be lower than the present incidence of the multiple indirect taxes in force. Consequently, the implementation of the GST is expected to bring about, if not in the near term but in the medium to long term, a reduction in the prices of goods and services. The expectation is that the dealers would start passing on the benefit of the reduced tax incidence to the customers by way of reduced prices. As regards services, it could be that their short term prices would go up given the expectation of an increase in the tax rate from the present 10% to approximately 14% to 16%.

The Dual GST is expected to be a simple and transparent tax with one or two CGST and SGST rates. The dual GST is expected to result in: reduction in the number of taxes at the Central and State level decrease in effective tax rate for many goods removal of the current cascading effect of taxes reduction of transaction costs of the taxpayers through simplified tax compliance increased tax collections due to wider tax base and better compliance

Experience of VAT implementation suggests that there may not be enough lead-time available between the date of announcement of GST implementation and the actual date of GST implementation. It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty (CENVAT), Service Tax and Additional Duties of Customs and the taxes to be subsumed under the SGST will include Value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Octroi, Lottery Taxes, Electricity Duty and State surcharges relating to supply of goods and services. GST is collected on the value added at each stage of sale or purchase in the supply chain. The tax on value addition is ensured through a tax credit mechanism throughout the supply chain. GST paid on the procurement of goods and services is available for set-off against the GST payable on the supply of goods or services. The idea is that the final consumer will bear the GST charged to him by the last person in the supply chain. It is thus a consumption based indirect tax. Presently, inter-State sales are subject to Central Sales Tax (CST), which is origin based. However, the GST regime would work under a destination / consumption based concept and hence the tax on inter- State sale transactions will accrue to the destination State. As a corollary, it will be zero rated in the Origin State. Applicability of taxes on imports of goods:- It must be understood that customs duties will remain outside the GST regime. Thus, the applicable basic customs duty will continue to be leviable on import of goods. In addition, both the CGST and the SGST are expected to be levied on imports of goods. Thus, the additional duty of customs in lieu of excise (CVD) and the additional duty of customs in lieu of sales tax / VAT will both be subsumed in the import GST. Tax on import of services and person liabile to pay:- Importation of services will be taxed and both the CGST & the SGST will apply on such imports. The tax will be payable on a reverse charge mechanism and the importer of services will hence need to self declare and pay the tax. As to which State will have authority to collect the relevant SGST, this will be determined based on the place of supply rules that the government is expected to notify for this purpose. Separate enactments for the Central and State GST:-There will be separate enactments. The CGST will be a common code throughout India. Further, each State will legislate its own enactment to levy and collect the SGST. However, it is understood that a white paper will be released by the Federal Government/Empowered Committee of State Finance Ministers based on which each State will legislate. The expectation is therefore is that a majority of the provisions will be uniform across the States. Expected aggregate rate of GST:-The aggregate rate of GST, across the Central and State GST, is expected to be approximately 16%. This is currently the subject matter of discussion within the Empowered Committee.

Different rates for goods and for services:- It is expected that there will be one single rate of GST on services at the Central and State level and the understanding is that there would be not one but a few rates of Central and State GST for goods.