Impact of GST on Supply Chain Management: Meaning and Reduction of Transport costs

The impact of GST on supply chain management has been significant. Implementing GST in India has consolidated various taxes into one, eliminating cascading effects. It has a measurable impact on the supply chain. Continue reading as we discuss this impact. 

Supply Chain and Supply Chain Management

A supply chain is a network of companies, individuals, and organisations involved in creating and delivering a product or service to the end consumer. It includes converting raw materials into finished goods and delivering them to customers. 

Supply chain management (SCM) involves managing the supply chain, as the name suggests. To achieve this, a company establishes a network of suppliers or links in the supply chain.

Supply Chain Before GST Implementation in India

The indirect tax system was characterised by multiple taxes and levies at various supply chain stages, resulting in a cascading effect of taxes. 

This resulted in complex supply chains as the businesses had to maintain multiple warehouses and distribution centres to comply with taxes, leading to higher logistics costs. 

Moreover, the industry was affected by dishonest practices such as bribery and corruption.

Supply Chain After GST Implementation in India

The impact of GST on supply chain management is as follows:

• GST removed the cascading effect and reduced the overall tax burden on businesses.
• It reduced transportation time and logistics cost, which led to increased operational efficiency, and faster deliveries in the industry.
• Post-GST, businesses no longer need to maintain multiple warehouses, which has decreased logistics costs.
• e-Way bill under GST reduces time wastage at interstate borders, reducing transit and lead times.
• The impact of GST on supply chain management has streamlined logistics operations, resulting in reduced transit times and lower costs. Here is an example of the impact on transportation in the pre and post GST era:

Implementing GST has reduced transportation costs by 15.4%.

• Logistics firms can opt for a central warehouse or warehouses at strategic locations (regional logistics parks) or use the hub and spoke model that in turn improves demand planning and inventory management.
• Consolidating stocks in warehouses improves demand planning and inventory management, whereas the construction of larger regional logistics parks equipped with advanced technology reduces holding costs and allows for product collaboration with other players.
• With larger warehouses, investing in ERP and automation systems for racking goods is financially prudent.
• Taxing the stock transfer under GST increases the number of direct deliveries. 
• Third-party logistics service providers can now manage larger transportation routes covering the entire country.
• Modified After-sales Distribution Models

ITC flow along the supply chain

The Input Tax Credit (ITC) mechanism under GST allows businesses to claim credit for tax paid on inputs used in manufacturing or providing services. The GST norms have impacted ITC flow in the supply chain in the following ways: 

• Can claim ITC only when suppliers file returns on time and accurately. A wholesaler, for example, can claim ITC only if the manufacturer reports it in GSTR-2B return. Otherwise, the wholesaler's credit gets delayed or goes unreported and working capital is blocked. 
• Any inconsistency or delay in filing GST returns can have an impact on ITC flow, resulting in increased working capital requirements and financial strain on businesses.