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INDIA: Introduction of Goods and Service Tax Act and implications on supply chain and distribution in India.

India recently introduced a new system of taxation - The Goods and Service Tax (“GST”). It is a consolidated indirect tax for India and should lead to a more unified common market for the country. 

Srijoy DAS - 15.01.18
Country expert

GST is a single tax on the supply of goods and services, which applies to all levels of the supply chain that is from manufacturers to the final consumer of the product. The GST also includes the introduction of the government rewarding credit to the purchaser as “input” tax paid on each stage of the supply chain. The tax will only apply to every subsequent state of value addition in transactions. This basically means that the tax levied would be essentially on the value addition at each stage and the remaining taxes will be provided back to the tax payers, as credits to be redeemed. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with the credit redemption benefits would be available to all persons in the previous stages.  

GST also alters the concept of intra state and interstate supplies and warehousing. Previously, the cost of tax was inbuilt and included in the pricing of goods or services in India, which included taxes like Central Sales Tax, Central Excise Duty, Cess, Service Tax, paid on inputs. Under the new system of GST, the main objective is to do away with the cascading taxes by providing seamless transfer and benefit of input tax credit to all levels of distribution of goods and services.

Therefore, companies engaged in distribution need to take note and to make alterations to the base price of goods and services necessitating the reworking of product prices with both suppliers/ vendors in order to maintain the same level of profits. As this requires internal computation and workings; both by vendors and suppliers, it is paramount at all manufacturers/ importers working in/ importing to India act with the utmost urgency. The prime changes are required in the following fields:

 

- Margins and fixation of Maximum Retail Prices

The Maximum Retail Prices are usually decided by the manufacturer and/or brand owner. The manufacturer/brand owner must carry out an exercise where the new GST tax rate must be factored in and new Maximum Retail Prices have to be decided.  

The percentage of margin i.e. percentage of earning by the wholesaler, distributors, stockists, and retailer is required to be re-fixed as the GST effect would cause for adjustment in the base price. These new prices would need to be adjusted in order for the distributor to earn the same margin.

 

- Relabeling concerns

Along with new base prices and profit margin decisions, amendments in product labelling and appropriate permissions for the same must be obtained , as per the Legal Metrology Act of India.

 

- Warehousing

Warehousing companies were based in various different geographical areas as it was effectively tax efficient. After the introduction of GST, companies are encouraged to consolidate warehouses as state based taxes have been replaced by the central GST rates.

 

- Transportation/Logistics

Previously, transportation was subject to levy of Central Sales Tax and varied state Value Added Tax (VAT). After the introduction of GST, the tax rates became uniform all over and state boundaries stopped being a parameter in determining the routes opted.

Roll out of GST has eradicated the delays caused at the state borders in India, due to inspections, filing of waybills/entry permits, compliances under various state laws. According to a report by Transport Corporation of India (TCI) and IIM-K (Indian Institute of Management Kolkata), these earlier requirements imposed a transaction cost of approximately USD 21 billion annually on Indian markets.

 

- Takeaway

Since the GST regime is still in its early days, it will take a few months to determine the real extent of change in law and the cascading effect at various levels of the supply chains in India. Businesses (including foreign distributors) must amend policies and practices in India in order to comply with the new tax regime. Foreign entities distributing in India must pay more than usual attention to the new regulations and ensure compliance.

 

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