Race against time

Mumbai was the grand finale for the ETIG Knowledge Forum on ‘VAT – Implications on Supply Chain Management’, in association with Safexpress. Like the other eight cities where the forum was held earlier, the edition at Mumbai on March 23, ‘05 was marked by a power-packed panel and was timed perfectly.

The Mumbai edition of the ETIG Knowledge Forum on ‘VAT – Implications on Supply Chain Management’ was held less than a week after the Maharashtra government’s notification of VAT on the Internet, and a week before clarifications on this tax reform during the on-going assembly session in Mumbai.

With the April deadline for the introduction of state level VAT in India looming large, every person in the select audience was anxious. The government was eager to get a consensus for VAT from all stakeholders, traders and manufacturers alike, while the industry endeavoured to adjust to the new tax regime that promises to defy the tried and tested.

A series of issues were raised and addressed underlining the importance of taxation for high-quality supply chain management in India.

So, why does VAT rake up so many SCM issues? Consider these points. Supply chain management is not just about trucks, warehousing or IT. It’s also about the costs resulting from government regulations.

While service providers may control the former to a large extent, the latter is almost entirely out of their hands. In India especially, it’s the multiple array of tax laws interpreted differently and varying tax levies that dictate how supply chains are configured.

Even today, India cannot be called a common market in terms of a uniform tax environment with every state levying anything up to ten taxes. These taxes add to costs for Indian-made goods vis-à-vis those imported using the many Free Trade Agreements that India is signing up.

The devil’s in the fine print. Consider how the central sales tax impacts one of the key aspects of SCM - warehousing and by extension, inventory management. To save on CST, most companies today boast of an extensive carrying and forwarding (CFA) network that is put up solely to save tax.

In fact, where one state could be serviced by just one stock point, there are often more than two. With increasing market demand, companies need to put up new warehouses or increase space in that market itself, rather than service increased demand from just across the state border.

This is because under VAT, stock transfers will get 4% more expensive from April 1 2005, so that the very purpose of doing interstate branch transfers to state warehouses is defeated.

There’s another anomaly: while buyers demand supply from local warehouses so that they can get ITC, suppliers pay 4% more for stock transfers to these local warehouses, with the result that buyers push for local warehouses, while suppliers don’t want to put them up.

No one really doubts the effectiveness of VAT in reducing tax burden and increasing tax revenues as it transforms large parts of the supply chain. However, the challenge is how to manage the change in cost structures due to VAT.