The possibility for a Goods and Service tax (GST) in India has been floating around for ten years, but it finally looks like real steps are being made towards implementation. Only this week, the Indian cabinet approved the constitutional amendment bill, and plans to rollout the tax from April 2016.
GST will rationalise state and central indirect taxes into a harmonised goods and services tax, and create a unified market, which will help allow seamless movement of goods across states, an especially important move for the automotive logistics industry that will hopefully also reduce business costs. The tax will be implemented as both the Central GST (CGST) and State GST (SGST), while exports will be zero-rated, and imports will be subject to the same taxes as domestic goods and services.
Experts have estimated that India will gain around $15 billion a year from GST, as it will boost growth, raise employment, and promote exports, while dividing the tax burden between manufacturing and services. Central and State taxes will be collected at the point of sale, and charged on manufacturing cost, which should lead to lower prices for goods.
At the recent Automotive Logistics India Conference, Nidhish Kuchhal, deputy general manager of demand chain management at Mahindra & Mahindra, explained how GST would offer companies an opportunity to reassess their supply chains. With the planned two-rate structure (CGST and SGST), Kuchhal expected a lower rate for necessary items, a standard rate for general goods, special rate for precious metals and exempted items, and services are likely to have a single rate for both.
Kuchhal explained that the perceived benefits of GST include lower and simpler taxes and more credit availability across goods and services. There will also be a free flow of goods and services between state borders and check posts, allowing India to become more of a common national market, thus encouraging a reconsideration of distribution strategies from the tax savings. As a result, he expected warehouse demand to increase, with it services around IT and improved management. He also predicted the number of logistics vendors and suppliers would consolidate.
For automotive logistics companies specifically, this will allow the chance to reassess the supply chain by a number of strategies, including: rationalising warehouses and transport network; exploring alternate distribution models; possible realignment of sales territories and demand regions; demanding forecasting process realignment; revising inventory positioning and norms; postponing assembly to drive logistics costs; consider outsourcing decisions for services; changing manufacturing and warehousing locations.
Companies will also need to consider whether to use in-house or contract manufacturing, direct selling or stock transfer, intra-state or inter-state procurement of goods, larger stockyards or multiple state level stockyards, and consider the possibility for multi-modal logistics and ways to optimise their routes.
The move to GST will not be without its challenges, however. The change of mindset moving to a new tax may be difficult at first, along with the need to standardise systems and build an IT backbone. It could also be frustrating if states are allowed to alter GST rates within a specific band, or have multiple SGST rates for goods, and different CGST rates for services. Considering both the benefits and challenges that lie ahead, Kuchhal said, “GST will trigger a major change in the supply chain of all major sectors and result in consolidation of the entire route to market, which will mean a significant shift from ‘cost focus and service conscious’, to ‘service focus and cost conscious’.”