GST is like a Super Star movie which we have been waiting for years together. This article is not to discuss the detailed structure of the proposed GST but discuss on what is in it from a Supply Chain standpoint. I keep hearing few businesses saying 'GST is here I can close down few of my warehouses and my supply chain is going to be super efficient'. This generic claim makes me really nervous. Let's see why.
First let me briefly explain the outlook of GST and let's first start with...
Pre-GST scenario - Direct taxes (income tax, wealth tax) and Indirect taxes (Central tax and State taxes). Excise, Service tax etc are under central and VAT, Entry Tax, Luxury Tax etc are under state.
Post-GST Scenario - Direct tax remains the same and Indirect taxes would be GST (CGST, SGST and IGST). IGST, CGST are Central and SGST is State.
Benefits with Puzzles:
- Unified taxation eliminating taxes like OCTROI, CST, Entry tax etc. But still we have GST split by IGST, CGST, SGST basis the transaction.
- GST (Central and State) is charged on the manufacturing cost and further as per the value addition done each level and charge at POS.
- Unified tax percentage - This can't be taken as a generic benefit since there are few sectors which are lesser than proposed GST tax slab % will get a hit and other sectors which are at higher level than proposed GST tax slab % will be benefited. Also, in the proposed GST there would be tax slabs.
So, the real benefit varies by Sector to Sector and also depending on which part of the supply chain you belong to.
By having Tax Slabs, Split by IGST, CGST, SGST the real excitement of GST Super Star is actually little Diluted. And if you happen to be in the sector where you can expect overall taxes are going to increase... GST is not going to be as exciting as you have wished for.
I saw one recent Ad of a Reputed Consulting Firm which says "Save Upto 20% on your Supply Chain Costs by GST Implementation". I feel really Pity for the Targeted Customers. Now, let's get to reality -
If an Organization to say that GST will solve my Supply Chain Problems then GST should solve at-least 50% of SCM Problems the organization have today. Now to effectively solve this business case, first we have to list the Supply Chain Problems faced by Indian Organizations, Isn't it? We didn't go for any external data, I sat with my entire team and built a matrix of all our 200+ Supply Chain Projects where- in we solved a SCM problem and categorized that as Strategy, Design, Planning and Execution. To read few of those case studies, you can visit this link
The data actually reflects the SCM Problems being faced and no wonder the problem which topped our Pie is the 'Supply Chain Planning'. SCM Planning + Execution issues contributed to more than 80% in the Pie. Now, let's evaluate each phase of Supply Chain to see the impact by GST.
- Supply Chain Strategy - Yes, there would be a Positive Impact by GST. But the change is going to be too costly for existing organizations.
- Supply Chain Design - Yes, this is where the GST Positive Impact will be the maximum if handled well. Keeping the Strategy, Supply and Demand as constraints the end to end of supply chain have to be modelled (network modelling and SCM simulation) to see the benefits before Implementation. A reckless and isolated decision here would be a disaster for the business.With GST, you can't just shut down warehouses; Since warehouses are not just to avoid taxes. There are factors like lead times, service levels, ease of operations, customer experience etc, all these have to be considered. If not, you are sure to open a new warehouse where you have closed down your warehouse operations just months before.
- Supply Chain Planning - On the planning, there is almost null positive impact by GST. This is an area where we have solved most SCM issues to stream line operations and support organizations scale up; For this there is no need for the organization to wait for GST roll out.
- Supply Chain Execution - Management becomes easier with unified taxation but considering the overall picture, this benefit is so microscopic. Out of the bigger problems we have solved in Supply Chain, the top issues in Execution are -
- Teams working in Isolation; Misalignment in strategy, plan to targets which result in all functions are green in performance yet the Organization is in RED.
- Lack of reliable processes and process controls.
- Lapses in Management.
- Process loop holes eating away margins. In SCM, no issue is small since these small issues, at a scale will erode in millions in the P&L. Most organizations fail to understand this.
Forunately, you don't have to wait for GST to solve these Supply Chain issues. You can start fixing them from today.
Consolidating all the discussion points, the Key Takeaway is -
GST when implemented will certainly simplify our taxation structure and would be a good start. But, from Supply Chain standpoint we have much more to do, rather than waiting or thinking that 'GST will solve all SCM Problems for us'. A thought like that is certainly a Myth.