GST expected to overhaul distribution setup

Manufacturers of not just automotive products but every manufacturing company with huge operations can make its process more streamlined and cost efficient

The goods and services tax (GST) set to be introduced next year will simplify taxation and change the way companies manufacture and distribute their produce.

Manufacturing companies with large operations will have the option of making process more efficient. Companies now pay central sales tax for transportation of goods across states and are not allowed to claim tax credit on it. Companies have set up warehouses across states to save the central sales tax, resulting in higher logistics costs.

“From having several factories or warehouses to take care of state taxes and entry restrictions, once the GST is in place it makes sense to consolidate manufacturing for economies of scale,” said R Ramakrishnan, senior vice-president (commercial), commercial vehicle business unit, Tata Motors.

Under GST companies can create central warehouses that can become hubs for multiple states. This will not only lead to tax savings but also help companies manage their supply chains effectively, said a Kotak report.

“Manufacturing consolidation will help through economies of scale and by making it easier for suppliers to collocate. Today one company may have five factories because of tax advantages but there are a lot of logistics involved,” added Ramakrishnan.

Tata Motors has 18 warehouses. If a customer buys a vehicle that enters his state he has to pay entry tax. Whereas a car maker merely does a stock transfer and there is no tax. “Under GST I can consolidate into four warehouses with greater operating efficiency because managing one location is cost effective than managing several,” Ramakrishnan said.

“The bigger advantage of GST is it will allow business to be structured more efficiently. Today where we locate a supplier, a plant, a warehouse is based on what is most tax efficient, and not what is most cost efficient. Once GST comes in, business will be run more efficiently,” said  Pawan Goenka, executive director, Mahindra & Mahindra.

“Today we have stockyards in every state because these permit stock transfer. In a GST regime we may do more direct billing and avoid extra handling,” Goenka added.