Launched at midnight of June 30th, 2017, the Indian Government has proposed to substitute the present tax system Value Added Tax (VAT) and Excise with Goods and Service Tax (GST).Under this new system, there would be common tax for all goods or services availed respectively. With the change in the tax structure in India companies will have to change their supply chain strategy in order to minimize their tax or fiscal cost.
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With the introduction GST, all taxes might become creditable, whereas in present tax structure the Central Sales Tax (CST) gets cascaded in the pricing and adds up in the cost of intermediaries. Secondly, the goods are not taxable under interstate transfer within companies warehouse but with GST, it will be taxable as per interstate goods and service tax at applicable rates. Thus with changes in taxation policy many industries may go centralized from their present decentralized mode of operation and reduce their warehouses to eliminate the interstate GST leading to massive supply chain restructuring in order to sustain in the industry.
From production of goods to consumption of goods or services the Indian Government levies different types of taxes for different activities (like VAT, Excise duty, service tax, sales tax etc).
Presently, there are four main types of taxes in India:
GST is a single comprehensive tax levied on Goods and Services at every stage of the supply chain from manufacture or provision of services to consumption. At every transaction point the seller or service provider will claim the input credit of tax which he has paid while purchasing the goods or service. This will eliminate the incidence of cascading or ‘Tax on tax’.
Currently, the Indian companies tales all its logistics and supply chain decisions for sourcing, distribution and warehousing based on the state level tax avoidance mechanism. Some of the options in relation with designing supply chain includes:
Indian manufacturers have to bear the burden of a plethora of taxes:
The advantage of India of having a low cost manufacturing base gets nullified due to the taxation system. The introduction of GST will simplify the whole regime to a great extent.
Impact of GST on Procurement of goods
Most of the companies try to reduce the procurement cost as procurement of raw materials constitute the major part of the product cost. Manufacturers have to compromise on quality due to interstate tax issues and procure from local vendors. GST can play a vital role in reduction of procurement cost by solving many conspiracies.
All movement of raw material, packaging and finished goods across the country is by road which in turn has its own issues. Badly maintained vehicles, poor physical infrastructure , checkpoints and entry barriers at all state borders makes transit very difficult. It takes weeks for goods to be transported from north India to South India whereas the same distance would be covered in a few days in a developed market. The slow growth in establishment of professional trucking fleets is a major cause of concern. Most companies being cost conscious tend to overlook the future efficiencies for current cost which reduces the usage of professionally managed fleets.
Impact of GST on Warehousing and Inventory management
GST can help companies take decisions regarding warehousing and inventory management polies.
Impact on Manufacturing sector
In manufacturing sector, GST can prove to be beneficial in many ways:
Introduction of GST can also prove to be a boon for the retail sector:
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