Dual GST will impact supply chains
The dual GST is an inflexion point in India’s fiscal landscape and marks a transition from the existing origin-based to a destination based taxation regime. The introduction of the dual GST is expected to remove the present problem of tax cascading by moving to a common tax base and by subsuming various Central and state taxes and levies into the Central Goods and the Services Tax (CGST) and State Goods and Services Tax (SGST) respectively.
One of the key challenges relating to the GST is with regards to supply chains. Now, the supply chains are impacted by several forces, some intrinsic to the organisation, some market specific and some fiscal in nature. Fiscal considerations have historically been a key determinant of supply chain structuring in India with manufacturing bases and distribution networks engineered primarily to harness fiscal benefits. The availability of tax exemptions/ benefits and the prevalence of differential taxes based on geographical locations have influenced the structuring of supply chains, procurement patterns and distribution networks. The dual GST would significantly impact supply chains from procurement through manufacturing to distribution. The dual GST presents both challenges and opportunities in this regard.
The existing indirect tax regime has several characteristics which negatively impact supply chains. These range from irrecoverable taxes such as the Central Sales Tax (CST), complex documentation of inter State movement of goods, entry barriers at State borders resulting in long transportation times and imposition of local levies such as entry taxes and octroi upon physical entry of goods into designated areas. These characteristics add to the cost of doing business in India. On the other hand, the GST endeavours to foster a single market in India through a seamless and uniform application of the CGST and the SGST on all taxable supplies, throughout the supply chain.
Fundamentally, the GST moves away from origin based taxation to a destination based consumption tax. This means that all taxation will be based on where consumption of a good or a service takes place. Also, the taxable supplies under the GST will extend to all inter State movement of goods, including on branch or consignment transfers not resulting in a sale of goods. This has major implications for supply chains, particularly on classic hub and spoke arrangements of centralised manufacturing and disaggregated distribution. Further, the CGST, which was hitherto limited to the manufacturing stage, as an excise tax, will now be applicable throughout the chain subject of course to turnover thresholds, below which the tax will not apply at all.
These thresholds will be different for the CGST and the SGST respectively. Also, the point that the CST will be abolished/discontinued is equally important from a supply chain configuration standpoint. It is evident from the First Discussion Paper on the GST, released on 10th November, that the Centre will levy an Integrated GST (IGST), which would be the aggregate of the CGST and the SGST, on all inter-State supplies of taxable goods and services with appropriate provisions for taxation of branch or consignment transfers.
The Discussion Paper also indicates that the existing locational exemptionsoncessions in relation to special industrial area schemesndustrial incentives etc. would be converted into cash refunds. This would mean that the CGST and SGST will be charged on supplies from such units, thereby restoring the GST chain. This also has its own implications.
These changes pose challenges for companies as to how they might engineer their supply chains so as to be GST efficient. It is probably fair to suggest that the longer the supply chain, the more the tax points in the GST scheme of things and hence increased compliance costs. The challenge and the opportunity is to thus compress supply chains for GST efficiency while ensuring that the business objectives in and around supply chains are also met. The dual GST consequently affords companies significant opportunities for realignment of procurement, manufacturing and distribution / sales patterns and to engineer their supply chains on purely economic considerations as opposed to fiscal considerations. For this purpose, a comprehensive GST impact assessment would need to be carried out.
Based on the information available around the structure of dual GST, the potential issues and areas of impact for a particular company could be identified and a detailed mapping of the ‘as is’ supply chain and the associated current tax costs would be done. Thereafter, the impact of the dual GST on this 'as is' model could be worked out and alternatives/options could be developed for changes in the supply chainusiness model in order to ensure that both the supply chain as well as the business model are GST efficient. Some of the options around re-engineering the supply chain would relate to decisions on indigenous supplies vis-à-vis imports; Intra-State vis-à-vis Inter-State procurement manufacturing service/warehousing & stocking locations, in-house vs contract manufacturing, direct sales vs stock transfers etc.,
The time is therefore opportune for companies to gear up to face the challenges as also to seize the opportunities that the transition from the present tax system to the dual GST has thrown up.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers