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In a way the structure of India's indirect tax regime can be classified into the 'pre-VAT' and 'post-VAT' eras. Before the VAT structure was introduced,
India had multiple taxes on different commodities, which were also taxed at different rates across states and no set off of input taxes were available.
There was also an incidence of 'tax on tax', wherein, a good whose raw material has already been taxed, will still bear a levy at subsequent stages of
production, until attained its finished form. This was done away with the introduction of VAT.
In the VAT regime, a manufacturer is allowed to claim an input tax credit: simply, he sets off the tax he has paid on the input, and other purchases,
against the final tax paid on the finished good. Thus, this eliminates the issues with multiple taxation and cascading effects. Thus, while at the central
level, the VAT has brought in greater uniformity both in terms of the rate and number of taxes, certain problems persist, if we look at the concept from a
state-wise perspective.
While the introduction of the VAT in the states has been a more challenging task, it has not been without results. By eliminating the multiple taxes
levied at multiple rates and abolishing the burden of several of the existing taxes, such as turnover tax, surcharge on sales tax, additional surcharge,
special additional tax, etc., the VAT has widened the tax base and brought in greater transparency. However, there is one shortcoming that still remains
in the VAT regime. The VAT credit is not available on inter-state sales of goods.
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While there is an input tax credit available on the VAT, the same doesn't work both ways: i.e. a manufacturer transporting goods from State A to State
B will not be able to claim an a credit on the input tax paid to State A from State B, and vice versa. This again creates an incidence of double taxation.
Moreover, the CST is a separate levy of 2 per cent on the price of the finished good that applies in case of interstate sale. This levy can be said to be
the main culprit behind the fragmented logistics policy adopted by most Indian companies, especially in the manufacturing sector. As there is no input
credit or set-off available against the CST, companies try to avoid the incidence of CST by setting up warehouses in each state/ region to transfer of
goods to the state of sale (CST is not levied on stock transfer).
For instance, in the case of FMCG industry particularly, companies have localised contract manufacturing set up in each state, to avail of a set off on
the input VAT against output VAT. The move also allowed companies to easily source inputs locally, given the low shelf life of products, especially,
food, dairy products, etc.
On the other hand, warehousing costs increase as more warehouses are set up. This because the space consumed for other facilities like
maintenance, offices, lavatories, aisles etc is much higher in a smaller warehouse as compared to a large centralised warehouse. Thus, total costs will
reduce till the optimal point beyond which the rise in inventory carrying and warehousing costs offsets the benefits from lower costs of transportation
and cost of lost sales. The implications of the total cost curve and the range of warehouses it reflects would differ for each company and each sector (
See chart below).
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Source: The Management of Business Logistics - A Supply Chain Perspective, CRISIL Research
Decentralized warehouses do not necessarily imply a poor logistics policy: for example, it is in fact optimal for certain industries like FMCG to maintain
a decentralized chain of warehouses and be as close to retail as possible, as it addresses the high substitutability of products and fast service
requirements and reduces the cost of lost sales. However, an efficient transportation system can allow a firm to improve customer service and lower
transportation costs even with fewer warehouses. Moreover, by increasing no of inventory turns, a company can lower its inventory carrying costs.
Finally, the decision to select a centralized or decentralized warehousing model would depend on the following key factors:
Source: The Management of Business Logistics - A Supply Chain Perspective, CRISIL Research
Order sizes are small: Again, the FMCG industry is an example here, as the nature of products lowers the shipments size. As such, it is more viable
for a player to maintain multiple warehouses, as multiple LTL shipments from a centralized warehouse would add up to a higher freight bill, as
compared to FTL shipments to decentralized warehouses followed by LTL shipments to local retailers. Clearly, transportation costs outweigh
warehousing considerations in this instance.
Need for high customer service: This usually correlates with high product substitutability. For instance, the lack of proper transport facilities or the
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absence of proper road infrastructure result in longer lead times and builds the case for decentralized warehouses.
It has a wide product line: In case of a wide product portfolio (across product segments) too, a centralised warehousing model will reduce heavy
investment in inventories.
Products need special warehousing: Investments on special warehousing systems, such as temperature-controlled storage, palletisation,
surveillance systems, and leak-proof structures, etc will necessitate a centralised warehouse, to reduce the expenditure on such equipment.
Post implementation of GST, firms will need to primarily identify and eliminate unproductive warehouses even if they may not necessarily opt for a
centralised model. In this process they will also have to carefully re-evaluate their supply chain network which will take into account the above major
factors.
Finally, for a company or sector, some of the factors listed above may be in favour of centralizing and some for decentralising, as in the case of the
FMCG industry, which has a diverse product portfolio as well as a higher potential for product substitution. Thus, to arrive at the optimum number of
warehouses, companies must analyse the total cost for different number of warehouses (as explained in the chart above). The resultant supply chain
decisions and the extent of consolidation will differ from sector to sector, as explained in forthcoming sections.
Revenue collection, current account balance have improved despite revenue neutral, contractionary rates;
Several countries have implemented the GST over the past few decades. Empirical studies of macroeconomic trends in these countries reveal several
interesting trends. We have considered three countries - one which implemented a revenue neutral rate (New Zealand), second with an expansionary
rate (Australia) and third with a contractionary rate (Canada). (A revenue neutral rate is the tax rate at which the there is no change in the amount of
revenue collected before and after the tax structure is changed). Moreover, it is to be noted that each country implemented the GST at a different
phase of the economic cycle.
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Irrespective of a neutral rate, all three countries witnessed a significant improvement in revenue collections after the GST was implemented. The
magnitude of fluctuations in the fiscal account balance reduced due to better tax collections during downturns compared to pre-GST era. In the long
run, the current account balance improved, as exports became more competitive, as lower tax rates resulted in more competitive prices. While the
actual impact on GDP and inflation cannot be established, as they are influenced by several other factors, during the year of implementation, GDP
growth reduced and inflation increased.
International comparison
Source: Working paper on Economics, University of New England