Place of VAT in the value chain – how do operations / supply chain managers look at VAT

• Beginning with France in 1885, at least 130 countries have implemented VAT, the structure of India with its
multitude of States and varying rules in different states had made the implementation challenging for
companies.
• States have their own tax flow patterns and in the absence of a single market, companies have to plan for each
state separately.
• A business pays only that amount as VAT which is the tax on the value that they have added in the production
chain.
• One of the major threat perceptions before the country's trading community is the huge amount of
documentation that VAT will entail. For claiming refunds companies will have to keep an account of the stock
of inventories at every step of supply chain.
• It is too paper-based. It is felt that an IT-enabled system would have minimized chances of corruption.
• Issues like VAT have an impact on supply chains, the management of which needs to be tailored to draw
benefits.
• An organization’s supply chain initiatives are dependent on the investments in facilities (warehousing and
transport) and information technology, geographical distribution of outlets as well as the scale of operations
and the number of SKUs traded.
• The traditional supply chain was a partially informed push/pipeline model with single direction information
flow. This is rapidly transforming into a fully informed network model with bi-directional information flow.
The main advantage is better inventory management, quicker and more accurate sales forecasts.
• Providing customers the right products and services all the time can be a complex, asset-heavy process fraught
with inefficiencies, waste and duplicate efforts.
• Transfer of stocks from factory to a depot in another State does not attract CST/VAT. VAT paid by retailers to
wholesalers/manufactures in the same State can be set off against VAT collected from end-consumers and
deposited with the revenue authorities.
• Therefore, purchasing the same product inter-State vs. intra-State would have a price impact of 4 per cent.
Accordingly, where a manufacturer is located in another State, it may be prudent to purchase from his
warehouse in the home State.
• It is also felt that supply chain management costs will increase unless a sound strategy is put in place by the
companies.
• Currently, most companies have to maintain warehouses for sales tax purposes in most or all States. As a
result, each company has over 20 warehouses across the country.
• As the end of CST is approaching, a company can reduce the number of warehouses improving operational
efficiencies and inventories.
• TRADITIONALLY, in India, supply chain decisions have been dictated more by tax considerations. A logistics
professional's ideal would be efficiency-oriented supply chain management rather than a tax-planning-oriented
one. However, for this, one would have to wait for the Goods and Service Tax (GST) — a single tax on goods
and services — to be implemented.
• In the new tax regime, the location of the stocking points will be governed by proximity to the consumers.
• As a result, the number of stocking points is expected to fall substantially and, depending on the business
model, companies will not require more than five to six stocking points across the country
• The current supply chain network in the country is geared to cater to the existing sales tax structure. As a
result, most third-party logistics players have a number of small warehouses scattered across the country.
• Companies would need to move to a hub-and-spoke model from the prevailing system that uses clearing and
forwarding agents (C&FAs), distributors and stockists. This change is easier said than done and will take
considerable time and effort.
• It is expected that during the next three years, distribution costs as a percentage of selling costs may decline by
20 per cent for various manufacturing companies. At present, distribution costs, including inventory costs,
account for 10-15 per cent of the total selling costs for the manufacturing sector.
• It may be appropriate to defer a decision to revamp the supply chain for the promised phase-out of CST. Till
there is clarity on this issue, distribution of goods through third party logistics providers, rather than taking a
decision on opening or closing of own warehouses, may merit consideration.
• The decision would also require an impact assessment based on whether the organization has a large front-end
or back-end distribution chain. It would also be appropriate to explore avenues such as Internet marketing.