Would the Incoming of Gst Improve Supply Chain in Fmcg Sector?
Some of the positive effects can be the reduction of warehousing costs due to rationalization and reorganization of warehouse networks, reduced inventory level, simplified warehouse planning and easy and simplified warehouse management. GST can also bring some negative effects like higher lead times to customer and higher freight costs, but all these effects can be negated and even used to the advantage with better strategy and planning of FMCG industries. Importance of a Sound Taxation PolicyTax policies have an important impact on the economy as they affect both efficiency and equity.
A suitable tax system must be designed keeping factors like income distribution , industrial macro environment and also aim to generate revenues through taxes to support the government in working towards infrastructure development and public service. There are broadly two types of strategy which can be used to maximize government equity, namely Horizontal equity model and Vertical equity model. The main characteristic of the vertical equity model is increasing revenues through high marginal rates of taxation, it can be applied to direct as well as indirect taxes.
The horizontal equity model depends upon broad, transparent and simple taxes which have low variance across the tax rates. It is better to rely on horizontal system rather than the vertical system. Cascading tax revenues can have a substantial consequence on firms in the economy. This can affect international competitiveness of those sectors of the production which are adversely affected by economy, eventually leading to monetary and nonmonetary loss of the affected economy. Taxation Scenario in India| India is a developing economy and so it is imperative for India to handle its resources more effectively.
Several policy instruments can be applied by the government for this effect, one of the most important one among these is revising taxation policies of India to maximize the efficiency of the economy. India’s taxation policy has been depending on indirect taxation for a long time now. Before tax reforms of nineties, major part of government’s tax revenues came from indirect taxes. The underlying logic for this was that India, being a country with high poverty and large income divide couldn’t afford to widen the scope of direct taxes without putting excessive load on the poorer section of the society.
There were also many practical difficulties involved as for majority of population agricultural income was their main income. About the taxation structure in India, the responsibility for the computation; levy as well as collection of most the taxes in the country lies with the Department of Revenue of the Finance Ministry of the Government of India. However, some of the taxes are even levied solely by the Local State Bodies or the respective governments of the different states in the nation.
At present, the Central Government levies tax on goods at the manufacturing level in the form of CENVAT, whereas the State Governments impose tax on goods at the point of sale in the form of VAT. The responsibility of taxing services lies with the Central Government, which began the service tax in 1994. As of now, the tax base is fragmented between the Centre and the States. The present indirect tax system is very complex with a multitude of taxes both at the Centre States, at present; do not have the powers to levy a tax on supply of services; while the Centre does not have power to levy tax on the sale of goods.
Goods and Services Tax GST (Goods and Services Tax) was introduced for the first time in 1954 in France. Today it has spread across 140 countries. On 22nd March, 2011, the finance ministry of India placed the 115 th Constitutional Amendment Bill in the Lok Sabha, which was hugely significant as it was about to introduce the Goods and Service Tax (GST) in the Indian Constitution. Introduction of GST marks the most significant reform in Indian economy and the Indian tax system. It has been proposed to introduce GST by April 1, 2012, which is the third such timeline proposed after missing two previous dates.
It is a major milestone for the Indian Tax System, which is expected to bring about changes in the way manufacturing, warehousing and distribution is carried out in India. Key Characteristics of Indian GST * Dual GST structute: CGST and SGST chain which will extend up till the last transaction at the retail level * Octroi and Entry Tax to be disbanded * Tax incentive of cross border sales and taxes may be dissolved GST and FMCG Supply Chain FMCG sector in India is one of the most important sector which will determine India’s growth in future.
Fiscal costs have remained a major factor for FMCG’s in India. India’s existing multi layered tax system has been a key element for FMCG’s for planning, establishing and structuring their supply chain factors like manufacturing bases, distribution networks and procurement partners. With the talks and rumors about implementation of GST in India, FMCG sector has been proactively trying to prepare itself for the changes in the future. The GST is seen as an inflection point in the history of India’s economic landscape.
It is expected to remove the confusion, uncertainty and cascading effects of the current taxes and consolidate them into Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST). Major Impact Points of GST on Indian FMCG Supply Chain Industry Impact due to Extended CGST Presently, services in logistics which are incurred post factory stage are not off-settable for CENVAT. Extended CGST will allow retailers and other post distribution networks to get back the tax. This will result in lowering the outsourced logistics cost as the current service tax of 10. % which is generally charged by logistics firms can be offset because of the CGST liability.
The result will be a boost in outsourcing for supply chains in FMCG’s. This will also provide more strength to 3PL’s. Impact due to Subsuming Octroi & Entrant Tax Octroi duty and other such local taxations have been a major revenue source when it comes to the corporations. Similar is the case for taxes levied by the states, like entry tax. Hence one cannot be sure whether these taxes will go and not return in a changed form, in case they go at all.
But taxes like Octroi and entry tax cannot be said in line with the GST spirit, even though entry taxes can be VATable sometimes. These taxes impact the decision of the firms for finalization of warehouse locations. They also affect the decisions on inventory and turn overs. This will result in lowering the outsourced logistics cost as the current service tax of 10. 3% which is generally charged by logistics firms can be offset because of the CGST liability. The result will be a boost in outsourcing for supply chains in FMCG’s. This will also provide more strength to 3PL’s.
Impact due to Removed Tax Barriers in Cross Border Sales According to the current scenario there can be two possible ways where this can happen: Scenario 1: The rates for CST would decrease to zero without any carry-over of interstate input credit. Scenario 2: Stock-transfers are not allowed and/or are taxed and sales of inter-state nature are taxed without any provision for carry-over. Both the cases will have similar effect. FMCG companies would not be required to own warehouses in every state for taxation purposes, to avoid CST or to facilitate stock transfers.
This would result in FMCG companies to design their networks based on only supply chain considerations and not like the present scenario where their aim is tax considerations. Thus, with GST, either CST would come down to zero or inter-state sale would be taxed without breakage of the VAT chain. Thus it will eliminate the need for a warehouse just for avoiding CST and doing stock transfers. Impact Explanation Case1: Re Organizing Warehouse Consider the case as illustrated in the figure, XYZ Ltd. company has a warehouse A in Rajasthan and B in Gujarat.
Warehouse B is near the border but due to current scenario cities in Rajisthan which are nearer to B are served by A, resulting in increased lead times, inventory pileup and transportation costs. After GST, B can be used to cater to such cities and A can be used to cater to areas nearer to A, thus expanding XYZ’s area of impact and reducing the costs. Impact Explanation Case2: Rationalizing Warehouse In this case, company XYZ can decide to remove warehouse from Madhya Pradesh and use warehouse in Rajasthan to cater to the areas in Madhya Pradesh.
This will reduce the inventory holding cost and savings on warehouse lease for the company. Impact on Companies network For any FMCG, the supply chain distribution network is divided into hubs (big warehouses) and warehouses. The introduction of GST will allow the firm to reduce the number of warehouses by merging, rationalizing or rearranging their existing network. Also, more strategically placed warehouses would reduce the time taken to serve major customers, thus increasing competitiveness and customer satisfaction. Impact on Cost and Investments Assume a FMCG firm XYZ Ltd.
With sales of 2000 Cr Rs, keeping 15 days inventory in their 25 warehouses with 25% safety stock because of current scenario. Assuming their logistics cost be around 75 Cr (4% of sales). Rough calculations can lead us to believe that because of the implementation of GST, the firm can have an inventory reduction of about 15-20% and logistics cost savings of about 3. 5 Crore (5% savings). Impact on Service Implementation of GST would mean fewer warehouses for FMCG companies, which effectively means that there may be longer distances between warehouse and customers.
This can result in longer lead times, higher lead time variability and reduced order flexibility. This can hamper the service to customers. But, this can be negated and even result in improved service if design and implementation of the network is done carefully. Impact on Freight cost It is expected that due to the implementation of GST, fewer warehouses would lead to increase in overall secondary freight costs. But the increase in freight cost can be expected to be small in nature.