In part 1 of Strategies for vendor’s GST readiness, we discussed how companies are realigning themselves on the ‘procurement side’ to brace up for GST. In this blog, we will focus on the distribution part of the supply chain.
During a workshop with a client’s leadership team, the MD mentioned that he would like us to educate his distributors on GST, especially on compliance. This was unexpected, as the distributors’ compliance could not impact my client, who supplies goods to them. In fact, it’s the other way round — my client’s compliance could impact his distributors. “Why then are you doing this?” I asked the MD. His answer was music to my ears. He told me, “When I understand from your workshop that this (i.e., compliance) is so important, why should I not sensitise my customers, who are so important to me. Perhaps in the longer run it will make the whole supply chain tax compliant and efficient. If it doesn’t, we can treat this as our contribution to our business ecosystem – call it our CSR [corporate social responsibility] initiative.”
I really appreciate his thought, as I personally believe GST should become a movement — those who know something, understand something, should spread the knowledge to get everybody on board, as only then we will succeed in implementing GST throughout the country.
Setting aside the CSR discussion, when I thought more about what the MD said, I felt that his company would even economically benefit by sharing knowledge, earning some tangible financial gains. Let us see how.
A workshop on compliance for distributors will sensitise them to the rigours of GST compliance, which include the electronic matching of credits. It will help ensure that distributors do not leave GST compliance to inexperienced hands, but rather appoint professionals to take care of accounting and invoicing. It may also make them seriously consider installing an IT system, if they don’t already have one, to ensure there are fewer manual errors. Ideally, when my client’s sales data reaches his distributors through the government portal, most of the data match the distributors’ data, and there will be fewer discrepancies. That could save my client time, which translates to financial savings.
Another benefit of a workshop for distributors is that they would learn what they stand to gain from GST. For example: Most the distributors today are registered only under VAT, and therefore any credit of service tax is a cost to them. Under GST, they’ll be eligible to claim the credit of tax paid on services, as tax on goods and services, manufacture and sales will be weaved into one single GST. This could help distributors reduce costs. If this benefit is passed on to the customer, the product prices would go down, which would positively impact sales. In fact, the government has come up with anti-profiteering provisions that make it mandatory for any taxpayer, including my client and his distributor, to pass on the benefits of GST to their customers. Educating distributors about GST could help in achieving that.
Rationalization and consolidation of distributors
GST offers an opportunity to rationalize distributors. Companies will be better able to weed out nonperforming distributors, realign geographies, and explore new distributors in new geographies. GST provides opportunities galore!
Consider a distributor in Hosur in Tamil Nadu, which is barely 7 kilometers from the Karnataka border at the closest point (Attibele), and 44 kilometers from Bangalore. Since state boundaries will no longer restrict the trade under the GST regime, a Hosur distributor will be able to sell in Karnataka, and a Bangalore distributor will be able to sell in Tamil Nadu, which is barely 36 kilometers from his city.
Of course, one of these distributors could become superfluous, or there could be an unhealthy competition among them. This situation would need to be monitored. The same holds true for manufacturing and trading depots. Companies must evaluate the ‘centre of gravity’ of their distribution centres (distributors/depots/branches, etc.) and reorganize them to better suit their business needs. Till now, locations were based more on tax considerations than business considerations.
One of our clients worked out a depot realignment strategy way back in 2012, when no one was talking of GST. He also factored a number of scenarios based on possible future logistical changes in logistics, such as coastal water transport, inland water transport, railroad transportation, etc. While very few companies look so much into the future, considering such trends and other factors when one is already realigning the depot strategy can be extremely beneficial.
Depot realignment will not only affect the number of employees — depending upon whether the number of depots increases or decreases under GST, it may also require retraining depot employees. Look at the Bangalore/Hosur example once again. If the Hosur depot/distributor can now sell in Karnataka, the person manning this depot will have to know or at least understand Kannada. He will also have to know the festivals of Karnataka, the holidays of Karnataka and even the psyche of a Karnataka customer: his preferences, and his buying motives if they differ from the Tamil Nadu customer.
GST may wipe out state boundaries for tax purposes, but cultural and language differences will persist, and businesses need to account for them while preparing for these new changes. GST transcends money and finance and enters the realm of psychology. But, of course, that is true for business, too!
Thanks to Dr. Waman Parkhi, Partner, Indirect Tax, KPMG (in India) for this blog contribution.
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Disclaimer: This blog is made available by Avalara for educational purposes only as well as to give you general information, not to provide specific legal or tax advice. The blog should not be used as a substitute for competent legal or tax advice from a licensed professional in your state or country.