Why have the hilly states, Himachal Pradesh and Uttarakhand, witnessed sprawling investments from the industries? What dissuades setting up of manufacturing and distribution centres within municipal boundaries of Maharashtra? Why do leading FMCG companies have as many as 20 warehouses across country when they need only 5 or 6? The supply chain and its efficiency are of tremendous significance in this competitive market scenario. There are several forces which impact a supply chain: some intrinsic to the organization, some market specific and others fiscal in nature. The fiscal costs have thus remained a key determinant of supply chain designs in India with manufacturing bases and distribution networks designed to garner fiscal benefits. Availability of tax exemptions/deferrals and the differential tax considerations across various geographical locations have played vital role in structuring of supply chains, procurement patterns and distribution networks. The excise tax holidays for long periods attract heavy investments from industry in states like Himachal Pradesh (Baddi) and Uttarakhand. Octroi in Maharashtra discourages manufacturers to set up factories and distribution centres in municipal boundaries where tax applies. To avoid the Central Sales Tax (CST) on inter-state sales, companies set up depots in each destination state. The CST doesn’t recognize the input tax credits and thus, inter-state sales without the indirect route turn out costlier. The dual Goods and Service Tax (GST) aims to address such fallacies of India’s taxation regime. It would transform the existing origin based taxation regime to a destination based taxation regime. Introduction of dual GST is expected to remove the cascading effect of taxes by moving to a common tax base and subsuming various Central and State level levies into Central Goods and Services Tax (‘CGST’) and State Goods and Services Tax (‘SGST’). Clearly, this would require re-work on supply chain strategies like: Indigenous supplies or Imports, Intra-State or Inter-State procurement of goods and services, Manufacturing/ Service/ Warehousing & Stocking locations, In-house or Contract manufacturing, Direct Sales or Stock transfers and Cost Sharing arrangements. Current Tax System and its Inefficiencies
In the pre-reforms era of taxation, indirect taxes were largely charged at different stages of the goods and services value chain with no regard to taxes paid earlier or later in the chain. The CENVAT and State VAT eliminated all of the complexities associated with the application of sales taxes at the first point of sale, brought end to harmful competition and lessened the cascading of taxes. However, the introduction of Service Tax received a mixed response because of its non - standardized nomenclature. In addition, the design of CENVAT and State VAT has not been comprehensive in terms of coverage of all goods and services in the tax base. The Centre is constrained from levying the tax on goods beyond the point of manufacturing, and the States in extending the tax to services.
The following table summarizes the deficiencies in the current tax system impacting supply chain:
Characteristic| Description| Negative Impact on Supply Chain| Taxation at manufacturing Level| * CENVAT is levied on goods manufactured giving rise to definitional issues of base and valuation| The tax burden on a particular product depends on the taxable value at the point of manufacturing relative to the value added beyond this point through service| Tax Cascading| * No input tax credit for CST on inter-state sales collected by the origin state * Partial Coverage of Central and State Taxes - Exempt sectors are not allowed to claim any credit for the CENVAT, state VAT or the service tax paid on their inputs.| * Companies set up distribution centres in individual states and make inter-states sales via consignment agents to avoid Centre Sales...