How GST will mean good business for leading commercial vehicle players

The taxability of stock transfer under GST will have an impact on cash flow of firms and might force rationalisation of their backend infrastructure

GST is going to change life in ways that Indian industry had not imagined in the past as it introduces the concept of seamless flow of input tax credit across the supply chain, from manufacturer to consumer and across state borders. Supply being the taxable event under GST, the concept of manufacture, trade etc. largely loses its relevance.

Under GST, levy of tax is on supply, accordingly any stock or inventory transfer is taxable. For intrastate transfer, stock transfer is taxable if the entity possesses more than one registration in one state. All inter-state stock transfers are taxable.

The taxability of stock transfer under GST will have an impact on cash flow of firms and might force rationalisation of their backend infrastructure. This will have a long-term impact on commercial vehicles, including, possibly, an increase in demand for trucks of lower tonnage.

Here’s why:

Post GST – Smart Management of Working Capital Warranted

Today, sourcing, distribution and warehousing decisions are planned based on state-level tax avoidance mechanisms instead of operational efficiencies.

Many companies resort to a lot of inter-branch transfers as these transfers are tax free. Under GST, the same will prove costly.

GST needs to be paid in the month when the transfer is done and although the tax paid on stock transfer will be fully available as input tax credit (ITC), the credit can be utilised only during the month in which the sale is done, blocking working capital. Thus, the working capital requirements will go up unless the backend is rationalised. Eventually, companies will restructure their storage infrastructure such that goods move from the primary warehouse to the dealer, thereby eliminating the need for multiple points of storage.

Efficiency the Sole Criteria, not Tax Avoidance

Post GST, companies will focus on leveraging efficiencies of scale, location and other factors relevant to the business. Since GST would eliminate the existing taxes on inter-state sales transactions it should facilitate consolidation of vendors and suppliers.

A more certain fall-out of the changes in the long-term would be reduction in the number of warehouses, improved efficiencies, better control and reduction in inventory due to lesser numbers of stocking points. This would allow a firm to take advantage of economies of scale.

Larger warehouses can benefit from technological sophistication by deploying state-of-the-art planning and warehousing systems which are not feasible in smaller, scattered warehouses. A rationalization similar to warehousing can also be done in distribution and transportation routes as tax ceases to become the deciding factor.

Logistics and supply chains will, therefore, see a major change. We envisage the emergence of a hub- and- spoke model.

So, the point-to-point or direct-route operations is going to be replaced by a mode whereby goods are sourced from a few large warehouses and distributed directly to the market. The hub is the strategic centre of the network, and the spokes radiating out to connect it with several points.

Dealing with a New Kid – E-way Bills

So far, GST has also introduced another new concept of E-way bills. The implementation time line is unclear, however. Thus, post GST, freight worth over Rs 50,000 will require obtaining a prior registration and generation of an e-way bill.

[Copyright By IST]