IMPACT OF GST ON STOCK MARKET & ITS COMPONENTS

SIDDHARTHA SHEKHAR
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PROJECT OVERVIEW
1. Current Tax structure vs GST structure
2. Tax implications on Supply chain Management
3. Impact on Procurement
4. Impact on Freight & Transportation
5. Impact on Warehouse & Inventory Management
6. Impact of GST on Manufacturing sector
7. Impact of GST on Retail / FMCG sectors
8. Impact on Logistics

CURRENT INDIAN TAX STRUCTURE

The Current Indian tax system has a dual structure. The tax is
levied by Central government as well as State government .There exists
a double taxation policy, tax paid earlier gets re-taxed, resulting in firms
paying tax on tax paid. Adding to this, the governments have multi-
layered system which brings inefficiencies and complication in the
system.
!
India’s Present tax structure
Source: Goods and Services Tax – Accenture Management 2011

• CST: Tax is levied on inter-state transaction of goods .In order to avoid

this , manufacturers typically move goods to a warehouse in each state
as internal stock transfer and sales that takes place are then shown as
intra-state transactions.CST has been reduced to 2% .
• Octroi tax: Tax levied on entry of goods into a town or city .To avoid
paying tax on inventory inside city limits, manufacturers locate
warehouses outside city limits and move the goods into the city only
when actual sales takes place. This results in addition of tier in supply
chain and consequently higher costs.
• Excise Duty: The companies are deploying their manufacturing plants
to regions which are exempted from excise duty even though high
logistics cost, high working capital and high time-to market is incurred.
• Value added tax (VAT): It varies from one state to another and are
exempted from Special Economic zones (SEZ)
• Service Tax: It is paid for any services like logistics involved in getting
the raw material to the end customers
GST STRUCTURE
In its simplest form GST is a single comprehensive tax levied on
Goods and Services at every stage of the supply chain from
manufacture or provision of service to consumption. At each transaction
point (sale or provision of service) the seller or service provider will claim
the input credit of tax which he has paid while purchasing the goods or
service. This will avoid the incidence of cascading or ‘tax on tax’.

!
India’s tax structure after GST
Source: Goods and Services Tax – Accenture Management 2011
GST would have three components –
• Central GST (CGST) – to be administered by the Centre
• State GST (SGST) – to be administered by the State Governments
• Inter-State GST (IGST) - to be levied on inter-State trade and
administered and collected by the Centre. The proceeds would be
transferred accordingly.
!

TAX IMPLICATION ON SUPPLY CHAIN MANAGEMENT

Currently the Indian company takes decision on logistics and
supply chain for their sourcing, distribution and warehousing based on
the state level tax avoidance mechanism instead of operational
efficiencies. Some of the options in relation with designing supply chain
• In House manufacturing or contract manufacturing
• Direct sales vs. stock transfers
• Manufacturing and warehousing locations
• Interstate or intrastate procurement of goods and services
• Indigenous supplies vs. Imports
Manufacturers in India have to bear the brunt of a plethora of taxes as
follows:
• Imported raw and packaging materials are subject to a complex
regime of customs duty, CVD, Cess and other levies. The multiplier
for landed cost is as high for finished goods even though the base
customs duty is very minimal. Many of the levies cannot be set off
and downstream taxation is applicable on the duties as well.
• Excise duty would then be levied on manufacture. Central Sales
Tax may be applicable if interstate sales are being done. VAT
would be applicable on sales within a state. Entry tax may also
apply for some states. Service Tax would be levied on transport.
In addition, legal compliance, book keeping and litigation further add to
the administrative and cost burden. Advantages that India has as a low
cost manufacturing base get nullified due to the taxation structure. The
introduction of a unified system of GST will simplify the whole regime to
a very great extent.

IMPACT OF GST ON PROCUREMENT

Raw materials cost constitute the major part of the product cost. Most
of the top companies try to reduce the procurement cost, since it can
have major effect on other factors. No policy of tax credit for inter-state
procurement in the current tax form. Cross utilization of ITC (Input tax
credit) would be allowed in Inter-state supply of goods The additional
customs duty in the import of goods will be subsumed by the GST Under
GST inter-state sales transactions become tax neutral . GST can play a
vital role in the reduction of procurement cost. It can solve many
conspiracies & can answer to certain decision making questions.
• Intra-state Vs Inter-state procurement of goods – Manufacturers
lose out on quality due to interstate tax issues & procure from local
vendors, GST can eliminate that factor.
• Can suppliers be consolidated?
• Import vs Local Raw material vendors
• In-house Vs contract - Most of the outsourcing works can be given
to the contact vendors. Hence company can concentrate on the
essential activities of the business.
PROCUREMENT STRATEGIES POST GST
• Procurement strategy will move away from taxation focus to focus
on time and quality of materials.
• Process redesign – Consolidation of suppliers and increased
options to consider – Importing materials
• Contract Renegotiation – Suppliers count will decrease for a
company moving towards consolidation of suppliers; leads to
contract renegotiation with suppliers for long-term benefits
• Focus will move from the producing states to the consuming states
since the tax arbitrage of states will go away
• Reliability and Quality will become important parameters for
consideration of suppliers

IMPACT ON FREIGHT & TRANSPORTATION

It is a matter of concern that India’s spend on primary logistics is
very high (Rs 2.7 Trillion in 2008-09 equivalent to 8.2% of GDP vs 5-6%
for developed countries due to several built in inefficiencies. All
movement of raw material, packaging and finished goods across the
country is by road. Rail transport has virtually ceased to service this
sector. Air transport is obviously expensive and is resorted to only in a
crisis situation. Road transport in turn has its own issues. Poor physical
infrastructure, badly maintained vehicles, checkpoints and entry barriers
at all state borders make transit a long drawn out process. It can take
upto 2-3 weeks for goods to reach from a factory in South India to North
India whereas the same distance would be covered in 2-3 days in a
developed market. Stock in transit is a significant element in the overall
inventory.
 The slow growth in establishment of professional trucking fleets is
a matter of concern. Most companies being highly cost conscious tend
to trade off future efficiency for current cost. This effectively reduces the
usage of professionally managed fleets.
With the advent of GST there is likely to be some consolidation at the
company level.
• Hopefully, there will also be a greater role for professional 3rd
Party Logistics Professionals who can bring about much needed
consolidation and expertise into this segment.
• GST can also reduce the wastage time at the interstate borders.
This can reduce the transit time to a considerable level.
• Avg. Inventory days can be reduced. Since interstate transactions
are tax free, Replenishments can be made quickly from other
states. Hence Avg. Inventory in hand will be reduced

• Maximum usage of Cross docking techniques

IMPACT ON WAREHOUSE & INVENTORY MANAGEMENT

Goods & services Tax can help the top management in solving most of
the decision regarding the Warehouse & Inventory management policies.
• Choice of Warehouse Locations, Depot Locations with respect to
the Plants and Markets
• Choice of the Warehouse Capacity and Depot Capacity – Safety
stock levels & reorder levels can be identified easily
• Choice of Inventory strategies such as Replenishment cycle,
Safety Stock, Milk Runs etc.
• Choosing between Continuous policy and Periodic review policy.
• No. of Distribution centres/ C&FA can be reduced &service level
can be improved through interstate goods movement.
 • Large regional logistics park can be developed to modernize
logistic infrastructure. By this, it is possible to combine with other
players in stocking the products. Hence the holding costs will
reduce.
• Improved Assortment
• Larger warehouses would make investments into automation,
racking systems and ERP systems more practical and cost
effective.

IMPACT OF GST ON MANUFACTURING SECTOR

GST can benefit the manufacturing sector in the following ways
• More flexibility in vendor selection, as location will no longer be a
constraint.
• Discontinuation of all area based excise exemptions and SEZ
related exemptions
• Auto component manufacturers setting up units close to OEM
plants for VAT credit chain can be avoided.
• Tax incentives will be provided equally in all states. Hence, new
plants can be opened in any states which will boost up
employment.
• Stocking of Pharma goods at Union territories can be avoided.
Initially, due to Tax exemptions, Pharma companies were stocking
their products in Union territories & in special economic zones
(SEZs).
IMPACT OF GST ON RETAIL / FMCG SECTORS
Over the years FMCG companies have responded to the tax
regime by developing a chain of C&FA agents in each state. Goods are
transferred to the C&FA (Clearing & Forwarding agencies) without a title
transfer thereby avoiding the incidence of Central Sales Tax. However it
is also true that stock movement to smaller distributors is difficult from
long distances. For instance if we consider a large state like UP, most
FMCG companies would need to develop 3 C&FA’s to cover the state
effectively especially if they are covering smaller markets. Typically, the
locations may be at Ghaziabad, Lucknow and Varanasi. It is a moot
point whether after the introduction of CST, FMCG companies would find
it suitable to reduce or relocate their C&FA’s in the state of UP. As long
as distributors continue to operate at town level, servicing requirements
may make it imperative to continue with distributed warehousing.

It is possible that the

numbers of C&FA’s may
come down to some
extent. For example if
interstate servicing of
distributors does not
attract tax, a C&FA at
Ghaziabad could service
both Delhi and
Uttarakhand in addition to
West UP.

!
• Total warehouse space may also come down as companies would
be able to use their warehouses more effectively and efficiently.
• Larger warehouses would make investments into automation,
racking systems and ERP systems more practical and cost
effective. At a rough estimate, these investments become practical
 for warehouses larger than 30,000 sq ft. Transportation will also
become more efficient and cost effective with the use of larger
vehicles for stock replenishment.
• This will help make information visible much further up and down
the supply chain and make it easier to integrate processes for
sharing data such as demand signals, inventory levels, alternate
transportation routes, etc. – a definite plus in terms of demand
planning and inventory rationalization.
• Inventory, transit stocks, stock outs would all come down. Also,
with stocks aggregated at fewer warehouses, information
management can improve, which in turn will improve planning and
assortment availability.
• CFAs can now become bona fide third-party logistics providers. At
the same time, customers’ demands for more value added
services will boost the adoption of technology solutions such as
warehouse management systems and track-and-trace offerings.
• Flexibility of differential pricing policy.
• Design of the Supply Chain such as Meshed Design vs. Hub and
Spoke vs combinations
• Will be able to compete in international markets due to lowered
costs of FG.
• In E-commerce, fulfilment centres can be setup at major cities to
reduce delivery time
IMPACT OF GST IN 3PL & 4PL LOGISTICS

The evolution of supply chain with increasing 3PL, 4PL providers

underline the need for having an efficient management to provide the
end-to-end supply chain solutions .Tax neutralization through
implementation of GST will contribute to streamlined warehousing by
decreasing the small warehouses that cropped up to cater to customers
in different states and increases the average warehouse size. The focus
of supply chain management will shift from avoiding tax to reducing
overall supply chain cost and asset returns, while developing the core
competencies and creating customer centric network structures. The
share of 3PL, 4PL providers rise further.

Opportunities in various supply chains

Inbound Supply Chain: The infrastructure of logistics will gain
importance over the location of the plant under GST regime. New
opportunities for outsourcing will be created in services like carrier
services and forwarder services
Outbound Supply Chain: In the post GST regime, the sales and
distribution models of the firms will undergo change which will act as
driver. Opportunities in warehouse management and distribution
operations will increase outsourcing
Aftermarket Supply Chain: In the aftermarket customer service will drive
outsourcing in claims management as value added service.

IMPACT ON STOCK MARKET

We all know about the advantages and disadvantages of GST. However

with GST on the horizon we must know how it influences the stock
markets, as volatile change in stock market can create an economic
disharmony and imbalance in the country. The focus on this article will
be mainly towards the positive aspects of GST on stock market.
Stocks that are positively impacted by GST

The above picture talks about the impact of GST on established stocks.
It has also been beneficial to startups and e-commerce ventures.
Reason
The common thing about all these sectors is that they are all
manufacturing companies that involve a lot of transportation. Logistic
companies and ecommerce ventures lke Flipkart get benefitted by GST
because of eliminating Octroi tax. Currently, Some state government
levy something called an OCTROI when your purchase enters the state.
These charges are applicable in Maharashtra and Gujarat and the
charges fluctuate as per the Government regulations. Octroi varies from
3% to 6% of the purchase value. The octroi charge is payable by the
recipient at the time of delivery or at the nearby check post. The courier
company will collect the octroi amount from the recipient at the time of
delivery. Bigger companies in the likes of Flipkart, Amazon typically
absorb these charges and pay the courier companies directly to avoid
delays in the shipment. Smaller companies like ours don’t typically have
this advantage as courier companies are not willing to pay octroi on their
behalf. With the Introduction of GST the courier companies do not have
to pay the Octroi tax as it will be replaced by GST. Most of the stocks
that will be benefited by GST come under the slab rate of 12% or 18%
except for FMCG and consumer durables which comes under 26%.

Advantages
• Can reduce the cost of logistics
• Organised sector can compete with unorganised sector with
respect to price
• Efficient Supply chain
• Improved Cash flow because of removal of excise duty
• It is going to make our tax administration a lot more efficient
because manufacturing taxes through excise duty and service
taxes as well as states VATs into a single tax, which brings a lot of
efficiencies that can add between 100 bps and 200 bps to GDP in
the long run.

These are the advantages by implementing GST and it can result in

better performance of the companies in the future.
Stocks that are negatively impacted by GST
GST Council has approved cess on tobacco products, and sin items.
Aerated drinks, pan masala, luxury cars and tobacco will be taxed higher
than 28 percent. The decision on rate for gold is yet to be taken.
Companies like Pepsi, Coca Cola, ITC would be facing a tough time.
Ideally they would have to diversify into other segments to negate this
effect of tax burden.
Conclusion
I would like to reflect upon what market expert Nilesh Shah mentioned
“From a market point of view there will be sectors related to let us say
complete outsider like logistics which will benefit because of the
implementation of GST as companies create more efficient logistics
solutions. It could also benefit those sectors where the current taxation
rate is higher than what is prescribed in the GST. It will be adverse
conversely to those sectors where the current taxation structure is lower
than the GST rate. So there will be sectors like automobile, white goods,
consumer electronics which may benefit because their current taxation
rate is likely to be higher than the GST rates.
More importantly the benefits of GST is not going to be just from the
direct implementation, it will be also via the indirect implementation so if
the government revenue goes up because of the GST implementation
they will have more money to spend on infrastructure. So, those sectors
will ultimately benefit with GST rollout.”
Thus it also depends on how these companies manage their money
efficiently with the finance bill being passed recently time will where all
the money goes and how the companies go about it.

REFERENCES
• Goods and Services Tax-Responding to an unprecedented
opportunity to transform supply chain performance in India, 2011,
Accenture Management Consulting
• Looking Ahead –The Big Opportunity for Network Design - GST
Introduction in India, ITC Infotech

• GST :Impact on the Supply Chain , Techopak Perspective,

Volume 2

• India’s Goods and Service Tax: the Case for Distribution Network
Redesign , 2012, Cognizant

• GST: An Opportunity to reassess your Supply Chain-Tata

Strategic Management Group,2011

• Impact of GST (Goods and Service Tax) On Supply Chain

Structure and Operations-Indus Momentus,2010

• Status of GST-Central Board of Excise and Customs, 2014.