GST will ensure that supply chains become leaner and efficient

While logistics undertakes the critical role of connecting production centres to consumption markets, inefficiencies in managing it leads to a severe disruption in the entire supply chain network. In the Indian context the experience pertaining to the supply chainsector has not been very encouraging, leading to colossal losses during the transportation, distribution and storage of goods. Hence, efforts towards addressing this problem are being met with much appreciation.

The current environment is likely to accelerate progress in the logistics sector in India, considering the interest from government as well as private enterprises. The Government of India brought out the National Manufacturing Policy with the objective of increasing the share of manufacturing in the GDP to 25%. The government’s ‘Make in

India’initiative is placing great importance on building best-in-class manufacturing infrastructure. The Goods and Services Tax (GST) will amalgamate several central and state taxes into a single tax, thereby mitigating double taxation and facilitating a unified national market. Further, inter-state industrial corridors, such as the ambitious Delhi Mumbai Industrial Corridor (DMIC), and freight corridors such as the Western and Eastern Dedicated Freight Corridors, are gaining renewed focus.

Since GST is at a critical legislative juncture and expected to be implemented in 2017, it will be the first significant catalyst in recent times to impact the warehousing market. Inter-state sale of goods involves Central Sales Tax (CST) levied by the central government and Value Added Tax (VAT) of the respective state. Since CST and other state taxes cannot be set off; inter-state sale becomes a costlier affair on account of duplication of taxation. Clearly, distributors avoid buying directly from the manufacturer in another state and prefer buying from a warehouse in the same state to remain cost competitive by saving on taxes. Such a tax structure in India has forced companies to locate warehouses in all the states where they operate, resulting in an inefficient supply chain.

Hence, instead of creating an effective supply chain by strategically locating warehouses, the focus remains on tax saving. This has shaped the need for bringing in an efficient tax structure that eliminates the state boundaries by creating a common market place for India. The concept of GST is a move in this direction. By providing input tax credit on all such inter-state sale of goods and services, GST will create a single, unified market for the country.

GST will ensure the abolition of CST, thereby making the country a single market that will no longer be divided by state boundaries. This will eliminate the need to have warehouses in each state to avoid CST, thereby ensuring the removal of a redundant level of warehousing in the supply chain. This will enable a reduction in the number of warehouses and allow companies to focus on building fewer, larger and more strategically located warehouses. Larger warehouses can benefit from sophisticated information technology (IT) systems like Warehousing Management Systems (WMS) that are not feasible in smaller, scattered warehouses. This will help in bringing down the cost and improve service levels through economies of scale. Supply chains will become leaner and efficient in terms of warehousing, transport routes, distribution and sourcing, wherein the decisions taken will be based on operational efficiency rather than a tax avoidance mechanism.