Effect of GST in supply chain of business
Business firms develop a supply chain wherein a network is created with the suppliers in order to produce and distribute a specific product to the final end consumer. This network includes different activities, people, entities, information, and resources. The main purpose is to reduce the costs and remain competitive while doing business.
The major elements of Supply Chain Mechanism (SCM) are Integration, Operations , Purchasing and Distribution. Integration focuses on improving and expanding communication between various departments by exploring better technologies and software. Operations include preparation of budgets, forecasting results and comparing actual performance with standards in order to ensure smooth production in the organisation. Purchasing focuses on acquiring budget-friendly material without compromising on quality. Distribution emphasizes on the final products and how they are transported to the ultimate user. These four elements work in tandem to each other. The impact of the biggest tax reform of this country i.e. GST, needs to be studied in the supply chain of business.
GST is a destination based tax, so it would have a huge impact on the supply chain of business i.e. right from acquiring the raw materials from the supplier to the point where the product reaches the end consumer. The impact on supply chain of a business after the implementation of GST can be understood through the following points-
- Due to the simplified tax structure i.e. with just 3 types of taxes (IGST, CGGST, SGST), manufacturers have shifted towards tailored supply chain models that is as per customer requirements. As other taxes have been subsumed by GST. The logistics cost has come down because of which business firms are able to satisfy the customers by producing goods as per their needs and wants.
- Warehousing costs have come down as other state taxes have been discontinued. Inventory is being managed effectively as there are fewer transit stays after GST. As a result of which the lead time has advanced and inventory levels have been reduced at stocking points. GST has eliminated the existing penalties on inter state sales transactions and has facilitated consolidation of vendors and suppliers. This has eliminated the need to have state wise warehouses to avoid other proceedings.
- In case of inter-state procurements, the IGST i.e. Integrated Goods and Service Tax is levied that has helped in bringing the logistics costs to a reduced level. This has helped manufacturers in expanding their vendor base outside state boundaries.
- There are more compliances and adjustment costs because the frequency of filing returns has increased for businesses. To claim the input tax credit, compliance is needed from every single party across the supply chain. This may hurt the profitability of the industry in the short run, but in the long run, operational efficiency is bound to enhance.
- Due to the fewer warehouses, the warehouses have been ramped up and equipped with state of the art technology to facilitate long term benefits. Latest warehouse management systems (WMS) and modern robotics are being used for the effective and efficient warehouse management.
- Under GST inter-state sales transactions between two dealers is cost equivalent compared with stock transfers / branch transfers. The inter-state seller will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. Similarly the importing dealer will claim credit of IGST while discharging his output tax liability in his own State. This will result in inter-state sales transaction becoming tax neutral when compared to intra-state sales. India has become one single common market no longer divided by state borders.
- At the same time IT costs of having ERPs deployed at many small warehouses has been saved. This has helped the firms operating at small scale to save on such costs and manage their supply chain effectively.
- Due to GST, there has been an increase in the availability of organized and efficient players. So a possibility of consolidation is there. Also, this has lead to the outsourcing of the logistics operations to logistics service providers so that the companies can focus on their core competencies (products).
The government has been able to bring about a positive change to the supply chain of business firms. After the implementation of GST, firms have been able to considerably bring down the inventory, warehousing and transportation costs. Management of supply chain has become cost effective. Logistics and distribution have evolved strongly as a competitive advantage. Thus, GST offers a great opportunity to revisit the Supply Chain & Distribution strategy and identify what is required to become GST ready.
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The author of above article is Tanuja Puri, Assistant Professor.
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