Impact of GST on manufacturers and their distribution networks - Goods Services

Impact of GST on manufacturers and their distribution networks

The implementation of Goods and Services Tax is India’s most important tax reform. It may well be the most important one since India’s independence. The implementation of GST needed a complete overhaul in business processes. It has changed the manner in which businesses operated. Who are the biggest beneficiaries of GST? The manufacturing sector is sure to benefit. But the reconciliation process is still underway.

The manufacturing sector is feeling the greatest impact of GST. Before this, manufacturers planned their warehousing and distribution strategies differently. There was an aim to avoid tax at the state levels. So, logistical efficiency was not always a priority. Now, GST is coming into play with a uniform and simplified approach. Manufacturers can finally reorganise their business strategies in the right way. They can concentrate on leveraging efficiencies of location and scale. They can focus on other factors that are relevant to their industry. Here are some of the advantages of GST for the manufacturing sector.

Reduction in the number of warehouses

Keep in mind the warehouse structure in India under the previous tax regime. Companies would build warehouses in different states. They wanted to avoid interstate taxation. They did this because the taxes varied from one location to another. So, companies focused on ways to stretch storage costs in the best possible way. A uniform tax regime is now in place with GST. Manufacturers no longer need to pay separate taxes in separate states across India. They can opt for a bigger warehouse at a centralised location. With this, they can cater to the demands of a clutch of states. GST has brought down storage costs significantly for manufacturers.

Better control on inventory and organised warehouses

There were complicated warehousing strategies in the previous regime. This led to stock outs in situations where there was a sudden rise in demand. GST helps in this regard. It enhances inventory efficiency. Manufacturers can enjoy economies of scale. They can make better forecasts about future demand too. Manufacturers will reap the advantages of this in the upcoming festive season.

Now, consolidated and bigger warehouses will become important. The new warehouses may be four to 10 times larger than the previous ones. So, manufacturers may consider automation and technical upgrades on a larger scale. This will improve service standards. It will also lower the costs of supply chain management. For instance, robotics specialists have seen a surge in demand from manufacturers already. Robotics can help manufacturers to become more reliable, agile, and efficient. GST is playing a key role in bringing about these changes.

Reduction in cost of freight

State boundaries have become redundant with the implementation of a uniform tax structure. Transport time and costs have also rationalised. Larger warehouses offer another advantage. Transport lot sizes have increased. This makes way for the deployment of larger and more efficient trucks. Further, the travel time for these trucks may see a large reduction.

The Ministry of Road Transport and Highways offers some numbers for this. It says the travel time of long-distance trucks has reduced by a fifth. A long-distance truck can now save up to 20% of its previous run time. This is because of the removal of interstate check posts. And it is all thanks to GST implementation. To put this in context, consider a truck travelling from Chennai to Kolkata. Earlier, this took about 60–65 hours to reach its destination. It takes about 55 hours now.

The rationalisation of costs has improved the efficiency of the distribution network. It has also provided manufacturers with an opportunity. They can now explore distribution models that are most suitable for their business. All this culminates in a competitive advantage for businesses.

Some manufacturers were quick to assess the impact and implication of GST. They put in place better warehousing strategies before July 2017. They are in a vantage position now. Meanwhile, others are still dealing with the GST headwinds. But reconciliation with GST by manufacturers is happening at a rapid pace. The benefits to the supply chain may appear from the fiscal year 2018/19.

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