How will GST impact the scenario of movement of goods across states in India?
The GST will turn the interstate movement off goods in the simplest way possible as first of all the market is common due to uniform tax. The common tax is going to been imposed nationwide on goods and services.
What is GST?
Goods and Services Tax is one indirect Tax for the whole nation. This will make the tax system more centralized and there by the market becomes centralized. GST aims to apply a uniform tax on the supply of goods across the chain from the producer to the consumer. This is one of the most important reforms to have ever happened in India. Traditionally taxes can be categorized into direct and indirect taxes. The central government levies the indirect tax on a producer called central excise. When the product is sold in a state, the state government adds a value added tax based on consumption. When coming to movement of goods across states in India, one major point to note is that, any material that enters from another state for production is certified as import. This means that any material that is purchased from other state would bear a state tax on addition to the central excise that is already levied by the central government. When the producer finally sells it in another state, he pays an export tax to the base state where he manufactures his product as well. The complexity and layering of taxes makes the economy fragmented. The aim of GST is to removes these tax barriers between the states to allow free movement of goods and indirectly increase the rate of goods movement across states. This will end the “tax on tax” charges that is happening currently being levied upon the products. The final consumer will bear only the GST charged by the last dealer in the supply chain. The government did not tax for transfer of goods between warehouses across different states as it wasn’t technically a sale. This made a lot of manufacturers open warehouses all over the country to save on taxes. Since there was no Input Credits for inter-state taxes, GST with its centralized taxes will relieve the manufacturers of opening a warehouses everywhere and focus on more efficient logistics and supply chain. With GST, the case of inter-state stock transfer has been simplified, the IGST is paid in full in the origin state which is available as tax credits on the destination state of sale. The GST is designed to be supported by a strong digital infrastructure to make the bills payable online and increase the speed and efficiency of the business. This will have a direct impact on competitiveness in the market. The eventual phasing out of Central Sales tax would help the manufacturers take advantage of manufacturing locally. For the governments on the other hand, a GST backed by a strong and robust IT framework would make it simpler to administer the taxes. This will also help the government to incentivize tax compliant traders.
The proposed rate structure is two layered. The basic items that are of importance have a standard rate in general. These correspond to goods that primarily essential and important. However precious metals hold a special rate. It has still not been decided what to add in the exempted list under VAT regime. These include the locally manufactured or locally important goods and services. The IGST will include both the CGST (Central) and SGST (State) on all the inter-state transactions of taxable goods and services. For example lets assume State 1 is exporting a product to State2. The exporting state, that is state 1 will transfer some credit to central government. The importing dealer will be able to claim credit for IGST while paying his output tax liability in his own state.
GST is going to play a major role in how the business is done hence it will also change the rules for the interstate movement of goods.
The impact of interstate movement of goods:
GST will bring a collection of loads and will redistribute transportation volume creating a different fleet. Identification of these patterns will help frame the right transportation contracts. GST will blend the services and goods taxes with a credit mechanism which will make their party logistics services more viable and inviting. With the integrated supply chain and tight linkages, the value added services and a service level agreement provides by the third party logistics will be worth the cost with services credit available in GST.
The current tax scenario caused suboptimal inventory decision support, guided more you tax minimization than by customers service level agreement. After GST strategic inventory placement will be possible. Achieve better customer service level for the same inventory investment or lower investment, or lower inventory investment for same service level will also be possible.
State level barriers and the central states taxes For interstate movement of goods and inter-state transaction. This will free decisions on warehousing and distribution from tax considerations and will be based purely on operational and logistics efficiency. From an infrastructure point of view this will lead to a smaller number but larger warehouses.
4. Supply chain
As GST is clearing the central and states multiple taxes a common tax regime will run restructuring of the supply chain network. The distortion imposed by the taxation will go away and the logistics networks will be designed to support the speed and efficiency required for that particular item.
With the advent of GST, every tax payer and tax paying organization will be connected to its suppliers through the GST network and will receive tax credits upon tax compliance of its suppliers. Which will lead to organisations being very selective and strategic in their choice of suppliers.
With GST subsuming all the extra taxes of state and central the uniform tax will be leading a restructuring of pricing and dealer margins. Pass through effect of taxes will come in and some benefit might be passed on to the channel and to the consumer. Price changes and competitor actions will have an integrated and direct correlation to volume/market share with an effect across the nation making real time pricing strategies an integral part of strategic decision making. Also changes to supply network and inventory will change product costing , thereby impacting margins as well.
After the implementation of GST there will be a requirement of a strong invoice matching the process as part of SOP. Organisations risk accusing input tax credits, which in turn will impact the cash flow immediately. Also the reconciliation is expected to be at the line items of the invoice. In the advent of GST, there would be a need to closely watch and calculate the GST payable and tax credits available. In case of interstate movement of goods IGST has to be paid in full amount in the state of origin which is available as credit in the destination state at the time of sale. This has the impact of blocking of working capital from the time of dispatch till the sale in the destination state.
8. Shared services
With GST in the picture tax filing is expected to be standardised across the nation through the GST network. Due to this standardisation the shared services team can facilitate local units in tax filing procedures. And also, due to standardisation of invoice formats, the automation of invoice processing in a shared services environment becomes extremely easy and simple. Thus, there are assured benefits for organisations to setup shared services units to facilitate tax filings, invoice automation and contract management process as a part of their business transformation exercise.