The Hindu Business Line : Logistically speaking

TRADITIONALLY, in India, supply chain decisions have been dictated more by tax considerations. A logistics professional's ideal would be efficiency-oriented supply chain management rather than a tax-planning-oriented one. However, for this, one would have to wait for the Goods and Service Tax (GST) — a single tax on goods and services — to be implemented.

Implementation of VAT was expected to bring uniformity not only to the tax rates but also in the procedures. Unfortunately, the VAT that has been implemented remains an input-tax-credit-enabled Sales Tax Act, due to distortions such as continuance of CST, different procedures in States on levy of VAT on pre-VAT tax concessions, continuance of road permits, entry tax, octroi, and so on. With several States yet to join the bandwagon, the diversity is more profound.

While VAT is the world's most favoured supply chain tax, the distortions in the VAT implemented in India offers formidable challenges and opportunities to plan the supply chain.

While industry would have fine-tuned the supply chain management to VAT implementation from April 1, 2005, the next few (or several) years, till the implementation of a unified GST, would be a challenge more because of the uncertainty than owing to the legalities involved.

The immediate issues that confront tax-oriented supply chain management are:

i) Will CST be reduced to 2 per cent with effect from April 1, 2006?

ii) Will CST be phased out and when?

The Empowered Committee of State Finance Ministers and the Central Government have committed to reducing CST to 2 per cent with effect from April 1, 2006. But the standoff on compensation for revenue loss of over Rs 9,000 crore per annum is not yet resolved. The Centre expects States to fend for themselves and is offering them powers to levy VAT on imports and additional excise duty (AED) on goods and greater share of service tax revenues.

States want an absolute right to tax services and would be happier with cash compensation in perpetuity. Considering the limited time available, it is unlikely that a satisfactory solution would be found by March 31, 2005. This may not stand in the way of reduction of CST to 2 per cent effective April 1, 2006, else the Centre would lose face. It is likely that the Centre may agree for cash compensation for a limited period till avenues for States to raise resources are agreed to.

The complete phase-out of CST may take longer. If CST is phased out, there could be a tendency of passing off a local sale as inter-State. So there is a need for a foolproof information system to track inter-State movement of goods. Considering the limitations in quickly establishing the necessary IT infrastructure and monitoring compliance, CST levy at the same rate of tax as applicable to local sale with facility of set off of CST by the dealer in the importing State is also under consideration. This also requires an efficient IT infrastructure and, therefore, the wait for a complete phase out of CST may take longer.

Coming back to designing of supply chain management (SCM) to handle these issues, there is need to have a short-term strategy for phasing out CST and a long-term one for GST.

While the reduction of CST to 2 per cent may not require any significant change in the current strategy, the phase-out of CST calls for careful planning, taking into consideration several internal and external factors.

It may be appropriate to defer a decision to revamp the supply chain for the promised phase-out of CST. Till there is clarity on this issue, distribution of goods through third party logistics providers, rather than taking a decision on opening or closing of own warehouses, may merit consideration.

The decision would also require an impact assessment based on whether the organisation has a large front-end or back-end distribution chain. It would also be appropriate to explore avenues such as Internet marketing.

Irrespective of these issues, the goal of any SCM should be to minimise the tax incidence in the entire supply chain without compromising on business opportunity and to ensure proper documentation and capturing of data for correct and timely compliance with reporting requirements. An understanding of VAT status, not only on the organisation but also of the suppliers and distributors, is imperative to minimise tax incidence in the entire supply chain.

With frequent changes, since April 1, 2005, in the tax rates of certain goods and in documentation and reporting requirements, the logistics professional should keep abreast of the changes. Closer coordination with IT solution providers and VAT domain experts is essential for efficient supply chain management. Also, it is time that logistics professionals hone their understanding of the impact of VAT on logical product structure analysis.

(The author, a Madurai-based chartered accountant, is a VAT and service tax consultant. E mail: sridharan@stvat.com)

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