GST Pulse - Should I revisit my warehousing strategy?

GST Pulse - Should I revisit my warehousing strategy?

The requirement of having a warehouse in almost every state where the company has customers may no longer remain a necessity

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We have discussed earlier that GST is bound to impact the supply chain of a business. One of the important components of supply chain is warehousing – let us see how GST can impact warehousing decisions.

Today, if a company decides to sell goods to a distributor (or dealer) in another state such a sale will be subject to the Central Sales Tax (CST). As CST is non-creditable in the hands of the distributor, it becomes a cost in the supply chain and eats into the margins of either the company or its distributor. If the same sale is routed through a warehouse, it does not attract any CST. Many companies therefore use the warehouse model to save on the tax costs, besides other logistics advantages of having warehouses in specific locations.  However they have to bear with the additional cost of maintaining warehouses. The exporting states- i.e. the states from where the goods have moved- also put a restriction on the VAT credit on inputs when finished goods are transferred to warehouses. As long as the cost of these two items is less than the cost of CST, the warehouse model can still be profitable. Such companies typically set up warehouses in almost every state. 

The tragedy in such cases however is that such decisions with regard to the location and number of warehouses are more influenced by tax efficiencies rather than operating and commercial efficiencies.

Under GST, seamless tax credits are likely to be available at each point in the supply chain. The requirement of having a warehouse in almost every state where the company has customers may no longer remain a necessity. This would encourage companies to rearrange warehouses. While on one hand, the adjoining areas of states like Delhi, Haryana, Rajasthan, UP and even Punjab can have a single warehouse, bigger states can have more than one warehouse depending upon the concentration of customers and other business considerations. In most cases companies can have fewer but more strategically located warehouses. The decisions relating to the location/number of warehouses would be driven by considerations like logistics costs, customer service considerations, just-in-time (JIT) inventory and not by tax considerations.

We have come across a company which had revisited their warehousing strategy way back in 2009 when GST was being initially discussed, and were ready to cut down on their 25 plus warehouses into a hub and spoke model in line with their business requirements once GST sets in. Another company worked with KPMG in India’s Supply chain team to conduct a deeper analysis. A software tool was used to zero in on locations where they should set up warehouses in the pre-GST and post- GST era. A two stage transition plan was developed which would take them from the old warehouse network to a new warehouse network in the pre-GST era and to a newer network in the post-GST era.

We have come across a company which had revisited their warehousing strategy way back in 2009 when GST was being initially discussed, and were ready to cut down on their 25 plus warehouses into a hub and spoke model in line with their business requirements once GST sets in. Another company worked with KPMG in India’s Supply chain team to conduct a deeper analysis. A software tool was used to zero in on locations where they should set up warehouses in the pre-GST and post- GST era. A two stage transition plan was developed which would take them from the old warehouse network to a new warehouse network in the pre-GST era and to a newer network in the post-GST era.

But one must remember that these advantages also come with a compliance requirement of taking credits and paying taxes, maintaining records and filing returns at each warehouse. This would add to compliance costs. 

The best supply chains aren't just fast and cost-effective. They should also be flexible and adaptable. Till date, tax had stopped businesses from creating supply chains that are cost effective, fast as well as flexible. Now is the opportunity to rework the supply chain to help derive maximum benefit – operationally as well as financially. This would no doubt take time. But those additional few months companies have got due to the non-passing of the GST bill in the last winter session of parliament, can be effectively used for this purpose. 

 

 

None of these materials is offered, nor should be construed, as financial, legal or other professional advice. The contents contained or made available through this web page is not intended to create any relationship between the reader and KPMG

 

© 2016 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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