Manufacturers of not just automotive products but every manufacturing company with huge operations can make its process more streamlined and cost efficient
The goods and services tax (GST), which is set to be introduced next year, will not only simplify taxation but will also play a pivotal role in changing the way companies manufacture and distribute their produce.
According to companies, manufacturers of not just automotive products but every manufacturing company with large scale operations will have the option of making its process more streamlined and cost efficient.
Under the current structure, companies have to pay central sales tax for transportation of goods across states and companies are not allowed to claim tax credit for central sales tax (CST). Because of this companies have set up warehouses across states to save the CST, resulting in higher logistics cost.
R Ramakrishnan, Sr. vice president (commercial), commercial vehicle business unit, Tata Motors said” “From having several factories or having several warehouse to take care of state taxes and entry restrictions once the GST is there those restrictions go away and then it makes sense to consolidate manufacturing to get economies of scale. It makes sense to have few large warehouses rather than a number of smaller warehouses.”
Under GST, companies can close down unutilised warehouses and create centralised warehouses which can become hubs to service multiple states. This will not only lead to tax savings but also help companies manage its supply chain more effectively, said a Kotak report.
Not just distribution but GST may change manufacturing channels too. Companies may look to consolidate their manufacturing footprints in favour of having one large base rather than having several bases.
“The manufacturing consolidation will help because not only it bring economies of scale for someone who is manufacturing lots of units in one location it will also become easier to collocate the suppliers to that factory. Today one company might be having 4-5 factories to serve different geographies all because it has certain tax advantages but there is a lot of logistics involved, it makes sense to consolidate manufacturing in one place. For manufacturers to manufacture under one roof will still make more sense despite the additional logistics cost”, added Ramakrishnan.
Large warehouses will take care of finished products. As of today, Tata Motors has 18 warehouses because a lot of states have entry tax. So if the customer buys from a company and the vehicle enters his state he has to pay entry tax. Whereas an automaker merely does a stock transfer and there is no tax.
“Under GST regime I don’t need to have 18 warehouses I can consolidate into 4 warehouses and have much greater operating efficiency because managing one location which is large is cost effective than managing several locations”, added Ramakrishnan.
Overseas those countries who have adopted a similar tax structure have initiated similar manufacturing and distribution changes.
Pawan Goenka, executive director, Mahindra & Mahindra said: “The bigger advantage of GST perhaps may also be that it will allow our business to be structured more efficiently. Today we take many actions in terms of where we locate a supplier, where we locate a plant, where we locate a warehouse based on what is most tax efficient, and not what is most cost efficient. Once GST comes in then that gets simplified significantly and then we will be taking action that will allow a business to be run more efficiently. For example, today we have stock yards in every state because that allows us to do stock transfer and not have to pay the CST of 2%. We do not need that in GST regime and we may do more direct billing and that way avoid extra handling that incurs cost to avoid 2% tax. So there will be many such things that we will be able to do under GST regime that will allow us to run our business more efficiently and at the same time save the 3% to 4% embedded taxes that we have because of GST.”
Source: Business Standard