Impact of GST on Warehousing and Supply Chain

Impact of GST on Supply Chain & Warehousing

Agenda  TRADITIONAL/NEW TAXATION AUTHORITY IN INDIA  GST – REGIME  THE ‘FLAWLESS’ GST ELEMENTS

 SUPPLY CHAIN PROCESS 

A TYPICAL TAX CASE IN MANUFACTURING SCENARIO – TRADITIONAL METHOD



A TYPICAL TAX CASE IN MANUFACTURING SCENARIO – UNDER GST



PRICE IMPACT OF GST

 IMPACT ON WARE HOUSING  GST IMPACT ON TAX EFFICIENT SUPPLY CHAIN  BUDGET AMENDMENTS IN SERVICE TAX

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TRADITIONAL/NEW TAXATION AUTHORITY IN INDIA

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TRADITIONAL TAXATION AUTHORITY IN INDIA

Union Levies – Central Excise, ADC, Service Tax & CST

T e Levy of Taxes x t

State Levies Text – VAT, Entry Tax, Entertainment Tax, Stamp Duty

4

Text

Local Administration – Octroi

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NEW TAXATION AUTHORITY IN INDIA

States – State GST

Union – Central GST

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‘GST’ – REGIME

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GST Forecasting

Elimination of cascading effect

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Effective allocation of Resources and Economy growth

Voluntary Compliance

OBJECTIVE OF GST

Incidence of tax falls only on domestic consumption

Optimize efficiency and equity of tax system

Foster the Achievement

No export of taxes across taxing jurisdictions

Enhances cause of cooperative federalism Integration of markets into a single common market

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A WELL DESIGNED GST A well designed GST is the most elegant method of eliminating distortions and taxing consumption.

Elegant Method Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction.

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THE ‘FLAWLESS’ GST ELEMENTS

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THE ‘FLAWLESS’ GST ELEMENTS

Dual levy imposed concurrently by the central and the state (CGST, SGST), but independently to promote cooperative federalism

No difference between goods and services

Common lists for Centre and States with little flexibility for States to deviate

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consumption-type GST - raw materials and capital goods in allowing input tax credit

GST is on Consumption rather than Production –Imports liable to both CGST and SGST. Exports should be relieved of the burden of goods and service tax by zero rating.

Exports / Inter-state transactions/ consignment sales and branch transfers – Zero rated

The computation of the CGST and SGST liability shall be based on the invoice credit method i.e., allow credit for tax paid on all intermediate goods or services on the basis of invoices issued by the supplier.

Cross utilization of ITC (Input Tax Credit) between the CGST and the SGST should not be allowed

Full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods

NO area based exemption

NO input stage exemption for the developers of, or units in, the Special Economic Zones

THE ‘FLAWLESS’ GST ELEMENTS CONTD…

The unit of taxation for the purposes of GST should be persons as defined under the Income Tax Act

One Tax Administration

States should also be liable to a penalty in case they deviate from the agreed design and structure of the GST.

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Revenue Neutral Rates

Common tax base and subsuming of various Central and State level levies into Central Goods and Services Tax (‘CGST’) and State Goods and Services Tax (‘SGST’). Payment of tax and the transaction reporting statement in Form No. GST-I - common for both CGST and SGST electronically on a monthly basis

Required to register and obtain a GST registration (PAN based 12 digit number)

Both the Centre and the States will cease to have any independent power to make changes in the design and structure once agreed upon

VAT invoice to be given with supply or payment for it.

New regime will impart greater transparency through market mechanism

levy should be based on audited accounts and not on the basis of any form of physical controls

SUPPLY CHAIN PROCESS

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SUPPLY CHAIN PROCESS Develop

Procure

Ship

Make

MRO

   

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Customer Service SelfCentre Service

On-line Ordering

Manufacture

Global platforms

Parts Distribution Mass Merchants & Warehouse Clubs

Design Engineering

Equipment or Facilities

Service

Supply Chain Visibility

E-Procurement

Raw Materials

Sell

Manufacture

Ship OEM’s

Strategic sourcing

Centralised purchasing

Inventory Management

Footprint reduction

Selling Consortia

Retail

Outsourcing

Dealers

Dealer Management Financing Insurance Collaboration

Increases collaboration with suppliers and customers Increases collaboration among supply chain elements and business units Leverages new technologies and streamlines internal business processes In manufacturing company, involves 70% of total spend

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A TYPICAL TAX CASE IN MANUFACTURING SCENARIO – TRADITIONAL METHOD 15

A TYPICAL TAX CASE IN MANUFACTURING SCENARIO Inbound

Inter - State

Outbound

Intra - State

CENVAT + CST

CENVAT + VAT

Distributors Intra - State

CENVAT + VAT BCD + CVD + SAD

Manufacturing Plant

V A T

CENVAT*

Ware house

V A T

Imported CENVAT + CST Services

Export No taxes Overseas

VAT* Domestic

ST Distributors Inter - State

CENVAT* = CENVAT-ITC VAT* = VAT-ITC

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TAX IMPACT ON SUPPLY CHAIN  Presently Companies handling manufacturing and distribution, design their supply chain to take benefit/reduce operational cost, based on the prevailing tax structure  In fact the cost and time matrix optimization is also from the perspective of reducing the tax liability, as one important parameter  Area based tax incentive, non-refundable input taxes are huge road blocks to reach optimum operational efficiency

 Slew of taxes add to the burden of book keeping leading to high overhead costs  Check post at state/city border considerably increase struck transit time leading to low Truck Turn around time and high transit inventories

 Service tax payable to Goods and Transporter Agency (GTA) on out bound distribution cannot be adjusted against output Service tax liability. This has remained as a cost 17

A TYPICAL TAX CASE IN MANUFACTURING SCENARIO – UNDER GST

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A TYPICAL TAX CASE IN MANUFACTURING SCENARIO – UNDER GST  GST–Goods and Services Tax aim is to reduce the overall tax burden and associated administrative complexity. Industry is expecting that roll-out of GST will make Supply Chain decisions tax neutral  Under the proposed GST regime, all taxes will be bundled under two heads Central GST(CGST) and State GST(SGST)  CGST will subsume all taxes imposed by Central Government and SGST will subsume all taxes imposed by State Government  In proposed GST model State Government will also be able to impose tax on services  In the proposed framework CSGT will be covering entire value chain up to retail level. This will help in widening the Tax Net

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GST IMPLICATION FOR SUPPLY CHAIN Abolition of CST will eliminate tax barrier between States. Companies can consolidate their warehouses to reduce overheads and improve operational efficiency B: Abolition of CST

Handling Charges=1

A: Existing Tax Scenario

TAX = 0 Freight = 6 Handling Charges=1 TAX = 0 Freight = 6

Gujarat

CST = 5 Freight = 6

Gujarat

Freight = 6 VAT=5 Freight = 2

VAT=5 Freight = 2 MP

MP

 20

 Cost on stock transfer = 14 Cost on direct dispatch = 11

Cost on stock transfer = 14 Cost on direct dispatch = 6

GST –PROPOSED TAX MODEL Inbound

Intra - State

Outbound

Intra - State

SGST

SGST*

Distributors Inter - State

CGST CGST+SGST

Manufacturing Plant

CGST *

Export Overseas

Ware house

Imported

CGST + SGST* CGST+SGST

Services

CGST + SGST*

CGST + SGST* Domestic

CGST + SGST Distributors Inter - State

Note- * Signifies here to exclude Input Tax

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PRICE IMPACT OF GST

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PRICE IMPACT OF GST Explanation

Price for Distributor ex refundable tax

Cost head

23

GST

A

Material Consumed

80000

80000

B

Manufacture profit

20000

20000

C CENVAT @ 12 %

12000

Nil

D VAT@ 12.5 %

14000

Nil

E

CGST@ 12 %

Nil

12000

F

SGST@ 8 %

Nil

8000

112000

100000

Sum (A+B+C/E+D/F)

126000

120000

Sum(C+D/E+F)

26000

20000

H Distributor margin @ 5% on G

5600

5000

I

VAT@ 12.5 %

700

Nil

J

CGST @ 12%

Nil

600

K

SGST @ 8%

Nil

400

G Sum (A+B+C)

Price for Distributor including all tax Tax paid : Producer to government

Present

1

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PRICE IMPACT OF GST [ CONTD…] Explanation

Cost head

Price for retailer ex refundable tax

L

Price for retailer including all tax Tax paid: Distributor to

government

Sum ( G + H )

115000

M Sum ( D + G+ H + I + J + K )

132300

126000

2

700

1000

N Retailer Margin @ 10 % on L

11760

11500

O [email protected]%

1617

Nil

P

Nil

1380

Nil

920

Sum ( M+N+O+P + Q)

145677

139800

Sum(O+P+Q)

1617

2300

Sum ( 1+2 +3 )

28317

23300

Total price to end consumer

Total Tax on end consumer

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GST

117600

Sum(I+ J +K )

CGST @12 %

Q SGST @ 8 %

Tax paid : Retailer to government

Present

3

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IMPACT ON WAREHOUSING

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IMPACT OF SUBSUMING OCTROI & ENTRY TAX Local tax such as octroi is a major source of revenue for the corporations and state taxes such as entry tax is a source of revenue for States. Thus it is not known whether these taxes will be merged into GST or not.

Octroi and entry tax are not in line with the spirit of GST although in some cases entry taxes are VATable

They impact the warehouse location decisions besides also the decisions on inventory and replenishments

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REMOVED TAX BARRIERS ON CROSS-BORDER SALES AND SUPPLIES

There are two possible scenarios through which tax barriers would be removed

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Scenario 1: CST rates would reduce to zero with no carry over of input credit across states

Scenario 2: Stock transfers are disallowed / taxed and inter-state sales are taxed with carry-over allowed

In both cases it would be no more required to have a warehouse in every state just to facilitate stock transfers and avoid CST

Organisations can and should design their networks purely on supply chain considerations and not tax considerations

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DETAILED IMPACT OF GST ON NETWORK With GST your organisation can have fewer but larger distribution warehouses and hubs with significant savings in logistics costs and inventory holding costs

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•

Estimates between 5-10% net savings in logistics + inventory carrying costs of an organisation.

•

A redesigning of the distribution network would be required to deliver optimal logistics and inventory carrying costs without compromising on service levels to customers.

•

New or enlarged warehouses will have to be designed/re-designed. Modernization of key warehouses is strongly recommended because of o Large sizes and more complex operations. o Increasing level and variety of service required by customers especially organized retailers. o Increasing scarcity of skilled labour and real estate requiring vertical and mechanized warehouses ©2012 Deloitte Touche Tohmatsu India Private Limited

IMPACT ON FREIGHT COST The increase in freight costs is expected to be small and there could even be a small reduction if all the freight cost reduction opportunities are exploited Overall secondary freight cost could increase due to fewer warehouses

Cost

•

• •

Overall primary freight cost could reduce due to fewer warehouse • Rs/tonne-km primary freight cost could go down due to larger scale and better rate destinations Rs/tonne-km secondary freight cost could go down due to larger scale Savings due to reduced back-tracking Benefit ©2012 Deloitte Touche Tohmatsu India Private Limited

GST IMPACT ON TAX EFFICIENT SUPPLY CHAIN

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GST IMPACT ON TAX EFFICIENT SUPPLY CHAIN Sourcing

Cost of procurement of goods and services to undergo a change

Distribution

Multi-level GST may need restructuring of business operations

Warehousing

Regional warehousing/ Distribution Center concept may undergo change

Pricing

Pre-work for GST – requires re-visiting

Inventory Control

Cash flow impact would need to be examined

Systems

IT packages may need review

Legal

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Settled points may lose relevance

BUDGET AMENDMENTS IN SERVICE TAX

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SERVICE TAX Rate of Service Tax:  Rate of service tax is being increased from 10% - 12%  The rate increase will be effective from 1st April 2012

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INTRODUCTION OF NEGATIVE LIST APPROACH:  The negative list based taxation system is to be implemented from a date to be notified after the Finance Bill, 2012 is enacted. Pursuant to it, service tax will be levied on all services provided or agreed to be provided in a taxable territory, except the following. • Services specified in the negative list • Services specifically exempted by notification

 In this context, the following steps have been taken: • The expression ‘service’ including declared services defined • The draft Place of Provision of Service Rules, 2012 have been issued for public comments • Certain exemptions have been given and most existing exemptions have been retained • Principles for determining the taxability of bundled services have been specified.

 Provisions relating to positive list approach, namely, sections 65, 65A, 66, and 66A currently appearing in Chapter V of the Finance Act, 1994, will cease to operate from a date to be notified later, as and when the negative list approach begins to operate 34

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AMENDMENTS IN FINANCE ACT, 1994: Chapter V of the Finance Act, 1994 is being amended:

 Proviso to section 68 (2) has been introduced to shift service tax liability partly on service recipient and partly on service provider for three specified services, if • The service recipient is a body corporate; and • The service provider is either an individual or a firm or LLP

 Section 65B has been inserted to define several expressions. In particular, the expression ‘India’ has been defined to mean: • The territory of the union as referred to in the Indian constitution • Its territorial waters, continental shelf, exclusive economic zone or any other maritime zones as defined in the relevant Act • The seabed and the subsoil underlying the territorial waters • The air space above its territory and territorial waters, and The installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for prospecting, extraction or production of mineral oil and natural gas and supply thereof.

Changes are to be effective from the date of enactment of the Finance Bill 2012

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AMENDMENT IN REVERSE CHARGE PROVISIONS Reverse charge mechanism Both the service provider and service receiver will be considered as persons liable to pay the tax on notified taxable services and to the extent specified against each one of them.

Taxable territory

• The term “taxable territory” has been defined in the Act and only services provided in taxable territory will be liable to tax. Thus any service provided in the state of J&K will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in J&K • Moreover wherever the service provider is located in J&K but the service is being provided in taxable territory, in terms of the stated rules, the tax will be collected from the service receiver

Notified services

Compliance

CENVAT credit

• The scheme is being introduced for three services where the service provider is either an individual or a firm or LLP and the recipient is a body corporate. The three services are as follows:

• It is clarified that the liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side

• Service provider is allowed Cenvat credit of tax paid by him on inputs and input services.

• Hiring of a motor vehicle designed to carry passengers: (a) with abatement (b) without abatement • Supply of manpower for any purpose • Works contract service

• Even though the above scheme can be given effect on enactment, it is proposed to time it with Negative List approach as a part of the comprehensive reform

• The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons.

• In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules, to this effect

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AMENDMENT IN REVERSE CHARGE PROVISIONS S.No

Description of service

Service

Service

recipient

provider

1

Hiring of a motor vehicle designed to carry passengers:

(a)

(a) With abatement

100%

Nil

(b)

(b) Without abatement

40%

60%

2

Supply of manpower for

75%

25%

50%

50%

any purpose

3

Works contract service

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AMENDMENTS IN FINANCE ACT, 1994: Chapter V of the Finance Act, 1994 is being amended:

• Section 67A has been inserted to prescribe the relevant date for the application of rate of service tax, value of taxable service and the rate of exchange • Section 72A has been inserted on the lines of Central Excise Act to introduce provisions relating to special audit under specific circumstances • The period of limitation under section 73 (1) of the Finance Act increased from one year to 18 months • Section 83 has been amended to include settlement commission provisions and revision mechanism for the assessee aggrieved by the order of the Commissioner (Appeals), as applicable in central excise. • Section 85 and Section 86 have been amended to reduce the time limit to file appeal before the Commissioner (Appeals) and revenue appeal before the Tribunal to 60 days to harmonies with the Central Excise provisions The above changes will come into effect from the date of enactment of the Finance Bill, 2012 . 38

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