GST has a far-reaching impact on the business of any organisation. It not only alters the way taxation of goods and services takes place, the concept of intra state and inter-state supplies, to the method of taxation, system of allowance of ITC, quantum of ITC and to its accounting and filing of returns. Thus, every area of business will require a relook under the GST environment.
The impact of GST on supply chain and distribution is discussed hereunder:
Supply chain includes sourcing and its logistics. Sourcing includes procuring /manufacturing; goods and services. Both could be out of imports, inter-state, local / domestic purchases, stock transfer / inter branch etc.
The cost of tax is inbuilt in pricing of any goods or services. Typically, in the product cost includes; taxes like the CST, Central Excise Duty, Cess, Service Tax, etc. paid on inputs. Similarly, in case of services; the taxes paid on inputs required to provide services, other input services are also embedded in cost of service. Of course, to the extent of the allowance of input tax credit and / or cenvat credit under the respective legislation reduce the incidence or the burden of taxation on input. Thus, to the extent of the taxes which are not eligible either as input tax credit / Cenvat or abatement(s) results into cascading of tax.
Base price and the change therein
Under the GST, the main objective is to do away with cascading of tax by providing seemless transfer of input tax credit to all levels of distribution of goods and services. Therefore, the base price on which the taxation would apply would undergo change necessitating the reworking of pricing with both supply / vendor as also customer / client.
A simple example will make this regard will be helpful.
|Base Price||87.5||Base Price||87.5|
|VAT @ 13.5%||13.5||GST @ 28%||24.5|
It can be seen that the base price on which the excise duty was levied would become the base price on which the levy of GST would arise. This is because the entire element of the duty/tax is now eligible for input tax credit leaving no burden of tax on onward distribution. Base price has to change because, excise duty, cess, service tax etc. levied / charged by his vendors is now available as ITC.
Please note, the incidence of tax and base price – Pre-GST and Post-GST mentioned hereinabove is illustrative figures and is worked out to understand the conceptual change.
The change in the pricing with the vendor would also require that the price charged by the supplier to this customer / client would also reworked. For example; where a builder and developer has awarded a contract to a contractor for providing and fixing aluminium glass windows during the pre-GST period, the builder would demand for reworking of the contract price considering the GST now to be levied. In this case, the contractor will have to calculate the incidence of tax which was factored into by him as cost (which was not available then as ITC and/or CENVAT credit) in the pre-GST period and compare it with the ITC now available in GST on such inputs of goods and services. This will give idea of reduction and/or increase in the tax due to introduction of GST. Obviously, before working out the incidence of tax in the transaction, the contractor will have to also demand the reduction in incidence of tax which the vendor would have factored in his pricing for supplies made to him/the contractor. Thus, the GST would require both the customer and supplier and its vendor to re-examine the indirect tax structure and base value on which such taxes to be levied.
Obviously, this involves internal computation and workings; both, by vendor and supplier and also by vendor’s of the vendor and so on. True, this chain reaction would require some time to settle out and in the transition there could be some cases where some partners in the supply chain may get benefited or impacted adversely. Surely, as GST settles down, the economics of demand supply and resultant impact on pricing will force the constituents of supply chain to rework out pricing / cost and offer their goods and services.
Government incentive schemes
During the pre-GST period there were some schemes floated either by Central Government under Central Excise Laws or some State under the respective laws to promote and / or for dispersal of industry into lesser developed area of economy. Thus, we have some schemes under the Central Excise for promotion of industry in Sikkim, Jammu, Baddi and other areas. Similarly, some schemes do continue under the VAT Acts of States in respect to some pockets of our country. These schemes essentially provide that the units set up in these areas have tax advantage [beside other incentives] to enable them to offer goods and / or services at concessional rate. Thus, buyer of goods / services from such units has lower incident of input tax. Under the GST Act these schemes are not continued. However, being part of the Government promise [and not to be charged with promissory estoppel], the Central and State Government has to compensate these unit with appropriate measure including cash refund by the respective Government. Surely, this would also impact the base price of the goods / services procured from such units.
Distribution of goods and services will surely also have its share of impact on pricing. When we discussed the impact on supply chain it also means the impact on the distribution of the earlier vendor.
MRP and fixation of MRP
Many cases, the manufacturer and/or brand owner decides and controls the product pricing in the distribution channel from the entire manufacturing till the retailer and consumer. The maximum retail price (MRP) is worked out considering basket of taxes like different types of taxes customs duty additional and special customs duty, cess, excise duty, surcharge and other cess, octroi and entry tax,
VAT, CST, service tax and other indirect taxes.
Therefore, before fixing the MRP of goods /services; the brand owner normally would factor the total burden of taxes which the consumer bears / transferred to bear as price of the goods / services. Moreover, in case where MRP of goods / services is to remain same across State , an additional exercise is done to find out average burden of taxes factoring different percentages of the State and local levies. Thus, the exercise of fixation of MRP is a function of lot many different types of taxes and incidences and finally the burden of the same on the customer / client. Since, in the GST regime, these constituents – indirect taxes in the MRP are to go total change, the entire exercise to fix MRP would require a to be done afresh. Once again, the prices offered by the vendors in the entire distribution channel as also suppliers of the goods and services from manufacturing till distribution including transportation, storage etc will have to renegotiate and there base price for taxation in the respective cases be re-fixed. These by itself is an exercise!
Margins in distributive channel
It is observed that the percentage margin in the distribution channel i.e. percentage of earning by the wholesaler, distributor, stockist, and retailer is required to be re-fixed since the very base price on which this percentage of margin was worked out would change. E.g. where the unit price on which the landed cost, say, in the hands of distributor is considered and the percentage of margin is worked out for the distributor, if the unit price is reduced downwards [before levy of tax – as the tax component is always a pass through] the percentage worked out on this lower landed cost would result into lesser margin in rupee terms. Therefore, in order to make distributor earn the same margin in rupee terms, the percentage of the landed cost may require upward revision.
Distribution design – Tax efficiency
In pre-GST period, several times the distribution model was designed to ensure efficient tax management i.e. to minimise the incidence of tax in the distribution. Accordingly, some cases, consignment agent were appointed or CNF agent were appointed or at times, goods were stock transferred to branches for onward sales. The customer may demand local VAT invoice to claim the ITC. The transaction / contract may be negotiated with separate terms for supply of goods and the services. The contracts were worded to suit claim of “sale in the course of import”, onshore and offshore provision of services etc. It seems there is total change in the way the GST – intra state and inter-state transaction with the mechanism of ITC in place, the entire distribution model may require to be revisited and again find the balance in tax efficiency in the distribution channel.
Decentralised billing v. centralised billing
Typically, for a service company providing services from different locations across the county, may also require revisiting the decision of centralised billing vis-a-vis billing from branches or service point. Surely, this will also require factoring the preference of the clients for an IGST vis-a-vis SGST and CGST invoices.
In case of common services, the GST mechanism provides for one or more place of business(es) as ISD. This mechanism will facilitate transfer of input credit to the other places of business outside the state of the credit in respect of input services. Thus, the accounting and transfer of such credit require to monitor and efficiently work to avoid blockage of credit, if any.
The rate contract for institutional supplies e.g. supply of medicine at Government Hospital, price contract with CSD etc. will require to be renegotiated.
Sales promotion items and gifts: Distribution of sales promotion items and gifts is typically done by the brand owner through the branch network. These items are either transferred to distributors who are in turn required to give it to customers or to targeted persons. Since the inter-state stock transfer from ‘distinct person” is considered as supply, such stock transfer would also attract IGST. Such IGST on inputs with the respective branch would be disallowed when these goods are distributed as ‘free’. At times, the C&F agent or distributors are required to incur certain expenses say local advertisement, hiring for man power for conducting marketing survey, purchase of gifts for special customers, holding event for marketing etc. These expenses are then reimbursed to the C&F agent or the distributor by the company. The arrangement will have to be re-worked out to ensure smooth flow of ITC in respect of GST paid on inputs of goods or services being reimbursed by the company.
To promote goods and services, various types of discount schemes are floated. These schemes are either given in the monetary terms i.e. by issuing credit note for discounts or are issued in quantity as “free quantity”. Under the GST, the debit note and credit note for pre-agreed discounts offered are to be uploaded and acknowledged by both the supplier and recipient. Thus, it is a two-way traffic on GST network.
The quantity given free invite disallowance of Input tax credit. Such schemes be reengineered and the invoicing be made in the manner to provide for rupee discount in the invoice and/or credit note equivalent to quantity offered as free. Care should be taken that the scheme floated also be rewarded to demonstrate it as extra discount.
Transition – Stock with MRP
In the transition, the goods in the distributive channel carries the MRP label based on the earlier incidence of tax which was factored and price fixed between the distributive channel accordingly. In the GST era, as discussed, the incidence of tax on the amended base price would change. Therefore, it is likely that even after considering transition benefits as per section 140(3) on the stocks held by the distributive channel, there could be some loss of margin the trade partners may suffer. Obviously, considering the business policy of the company the brand owner may have to compensate the trade partners in such cases.
MRP – Re-labelling – Stickering – Legal Metrology Act
The fixation of label of MRP is governed by the provisions of Legal Metrology Act. Refixation of pricing or relabeling is strictly governed by this Act. Thus, if MRP is to be amended appropriate permission and procedure as provided therein needs to be observed. Wide Trade Notice dt. 4-7-2017, Ministry of Consumer Affairs, Govt. of India, under the Legal Metrology [Packaged Commodities] Rules, 2011, the Government has allowed the refixation of price by affixing stickers by the manufacturer or importer only. Thus, if the manufacturer or the importer holds this stock as on 30-6-2017, such stocks can be relabelled as per the Act. Mind you, this relaxation is not applicable to the stock held by the partners in the distribution channels. Thus, relabelling by the distributors, stockists and retailers is not permissible.
Godown – Need to obtain registration
In the GST era, business will have to take decision in case of import and distribution of goods where goods are to be stored at the port for some period where activities like grading packaging etc. are carried out at this location and traded from there. At times, the goods are simply stored for some time before its sale. If the goods are stored in public warehouse one may examine the need or otherwise of the registration at this location.
Issue of P.O. by H.O.
It is common observation that the head office negotiates the prices with the vendors and issues purchase order for requiring the vendor to dispatch goods to factory/ branch from other States. Under the GST Act, these transactions are similar to ‘bill to ship to’ type of a transaction. This will require internal billing between the head office and the factory / branch and the purchase invoice from the vendor in the name of head office. This by itself would require relooking at the system of issuing purchase order in the organisation.
Cash-flow and working capital impact
Since the adjustment of SGST CGST of one state is not permissible against the liability under the SGST/CGST from another State, care will have to be taken to monitor accumulation of credit in the state and try and examine opportunity to utilise these credits efficiently by an organisation. This could have substantial impact on cash flow of company and need for working capital.
Since inter-state stock transfer of goods will invite IGST liability, one will have to examine the time lag of the liability of IGST and its utilization by the receiving branch. The longer time lag will involve higher working capital needs.
The introduction of GST has brought about the shift in the way the business is conducted. As discussed, one of the objectives of the introduction of GST is to bring transparency and level playing field amongst businesses across the states. It is expected that the business would take decision based on business exigency and not to work out tax efficiency. The supply chain, the distribution will get re-modelled accordingly. We hope the GST ushers in much desired transparency and efficiency in the businesses.