India’s GST unifies taxes to cut logistics costs and improve supply chain efficiency, leading to faster deliveries and better warehouse management.
The article discusses how the Goods and Services Tax (GST) has transformed supply chain management in India, particularly by simplifying the tax structure and reducing logistics expenses. It explores the state of supply chains before and after GST implementation.
Understanding Supply Chains and Supply Chain Management
A supply chain encompasses a network of businesses, individuals, and organizations involved in producing and delivering a product or service to its final consumer. This includes the entire process from converting raw materials into finished goods to their distribution to customers. Supply chain management (SCM) involves overseeing this entire network, which requires establishing connections with various suppliers and links within the chain.
Supply Chain Dynamics Before GST in India
Prior to GST, India’s indirect tax system was characterized by numerous taxes and levies imposed at different stages of the supply chain. This led to a cascading tax effect, where tax was paid on tax. Businesses were compelled to maintain multiple warehouses and distribution centers to comply with diverse state tax regulations, significantly increasing logistics costs and creating complex supply chains. Additionally, the industry faced issues like bribery and corruption.
Supply Chain Dynamics After GST Implementation in India
GST has profoundly impacted supply chain management in several ways:
- It eliminated the cascading effect of taxes, reducing the overall tax burden on businesses.
- The system improved operational efficiency and facilitated faster deliveries across the industry by decreasing transportation time and logistics expenses.
- Post-GST, companies no longer need to operate numerous warehouses, leading to further reductions in logistics costs.
- The e-Way bill system under GST streamlines transit across interstate borders, cutting down on time wastage and shortening lead times.
- GST has optimized logistics operations, leading to reduced transit times and lower costs. The table below illustrates the changes in transportation costs from the pre-GST to post-GST eras:
| Pre-GST Era | Post-GST Era |
|---|---|
| Truck travel distance: 800 km | Truck travel distance: 800 km |
| Fuel price per litre: Rs. 70 | Fuel price per litre: Rs. 70 |
| Average truck speed: 40 km/hr | Average truck speed: 40 km/hr |
| Toll tax (per toll booth): Rs. 60 | Toll tax (per toll booth): Rs. 60 |
| No. of state borders: 2 | No. of state borders: 0 |
| VAT: 14% | VAT: 0 |
| GST: 0 | GST: 18% |
| Total transportation cost: Rs. 23,880 | Total transportation cost: Rs. 19,200 |
- The implementation of GST has resulted in a 15.4% reduction in transportation costs.
- Logistics firms now have the flexibility to establish central warehouses, strategically located regional logistics parks, or adopt a hub-and-spoke model, enhancing demand planning and inventory management.
- Consolidating inventory in larger warehouses improves demand forecasting and inventory control. Constructing extensive regional logistics parks with advanced technology helps reduce holding costs and promotes collaboration among various players.
- With larger warehouse operations, investing in ERP (Enterprise Resource Planning) and automation systems for racking goods becomes a financially sound decision.
- Taxation on stock transfers under GST has led to an to increase in direct deliveries.
- Third-party logistics providers can now manage broader transportation networks spanning the entire country.
- After-sales distribution models have also been modified.
Input Tax Credit (ITC) Movement in the Supply Chain
The Input Tax Credit (ITC) mechanism under GST allows businesses to claim credit for taxes paid on inputs used in production or service provision. GST norms have influenced ITC flow in the supply chain as follows:
- ITC can only be claimed if suppliers file their returns accurately and on time. For instance, a wholesaler can only claim ITC if the manufacturer properly reports it in their GSTR-2B return. Otherwise, the wholesaler’s credit may be delayed or remain unreported, blocking working capital.
- Inconsistencies or delays in GST return filings can disrupt ITC flow, leading to increased working capital demands and financial pressure on businesses.
