Cognizant 20-20 Insights

Indias Goods and Service Tax: the Case

for Distribution Network Redesign
Executive Summary
Fiscal costs have remained a key determinant of
supply chains in India, with manufacturing bases
and distribution networks engineered to harness
fiscal benefits. The availability of differential tax
structures across geographies has remained one
of the key decisional elements for structuring the
supply chains, procurement patterns and distribution networks in India. With that consideration,
the Goods and Service Tax (GST) stands as an
inflexion point in Indias fiscal landscape. It marks
the transition from an existing origin-based
taxation regime to a destination-based taxation
regime. The introduction of GST is expected to
remove the cascading effect of taxes by moving
to a common tax base and subsuming various
state and central taxes into Central Goods and
Service Tax (CGST) and State Goods and Service
Tax (SGST). The introduction of such a common
tax structure will significantly impact the procurement patterns, supply chains and distribution networks of manufacturing firms. This will
present both opportunities and challenges for
firms doing business in India.
One of the opportunities is to make the supply
chain leaner, but the challenge lies in actually
doing it. Optimizing the supply chain entails
relooking at the business model in a fundamen-

cognizant 20-20 insights | march 2012

tal way because it impacts so many areas of

the business. For example, some of the options
around redesigning the supply chain would relate
to the following:

Indigenous supplies vs. imports.

Intrastate or interstate procurement of goods
and services.

Manufacturing and warehousing locations.

In-house or contract manufacturing.
Direct sale vs. stock transfers.
Warehousing changes can be taken as a case in
point here to understand the impact that GST
may have on supply chains and other elements
of business.

What Defines Warehouse Location?

Warehouses are an important part of any supply
chain. A strategically placed warehouse not
only improves customer service levels but also
reduces the burden on other elements of a supply
chain. In India, apart from other criteria such as
customer service levels, freight costs, etc., the differential state and central taxes levied on sales of
goods largely affects the location of a warehouse.
To understand this, we will use a typical supply
chain setup as shown below.

Typical Supply Chain

Firm

Warehouse/
Depot

Distributor

Retailer

Customer

Figure 1

goods to the warehouse before actually selling

it to the distributor in that state. According to
current tax laws, this transfer carries no central
sales tax (CST) since no sale has been realized.
In this case, the value added tax (VAT) is applied
only after a sale is made to a distributor using the
warehouse. Also, the VAT paid by the distributor
to buy from the warehouse is used as an input
tax credit bringing down the price before tax
of the goods for retailers. A sample calculation is
shown below for understanding.

Current State
Lets look at two scenarios that show how a
consumer goods (CG) manufacturer sells its
goods to a distributor and how that impacts the
location of the warehouse in a non-GST environment. The input tax credit at the source and
the logistics costs in landed cost component have
been ignored for simplicity.
Scenario A: Stock Transfer Sale
Lets assume a firm operates a warehouse in
another state and does a stock transfer of its

Current State: Stock Transfer Sale

3

Supply
Chain
Point

Landed
Cost
(in `)

Margin
(in `)

Input VAT
Price
Credit
Before Tax
(in `)
(in `)

VAT

CST

Total Tax
(CST+VAT)
(in `)

Final
Price
(in `)

Firm

200

50

250

0%

0%

250

Warehouse

250

250

4%

0%

10

260

Distributor

260

20

10

270

4%

0%

10.8

280.8

280.8

15

10.8

285

4%

0%

11.4

296.4

Retailer

case, the firm pays CST on this interstate sale.

The rest of the transactions in the supply chain
remain the same. Now the calculations look as
shown below.

Scenario B: CST sales to Distributor

Lets assume the firm decides to sell its goods
directly to the distributor located in another state
without holding a warehouse in that state. In this

Current State: CST Sales to Distributor

Supply
Chain
Point

Landed
Cost
(in `)

Margin
(in `)

Input VAT
Credit
(in `)

Price
Before Tax
(in `)

VAT

CST

Firm

200

50

250

0%

2%

255

Total Tax
(CST+VAT)
(in `)

Final
Price
(in `)

Warehouse

0%

0%

Distributor

255

20

275

4%

0%

11

286

Retailer

286

15

11

290

4%

0%

11.6

301.6

cognizant 20-20 insights

In scenario two the final price (`301.6) for the

consumer increases in comparison to the final
price (`296.4) paid by consumer in the first
scenario. To maintain the same price (MRP) for
the end consumer, the firm has to take a hit on
its margins so that the distributor and retailer
margins are preserved. This happens because
unlike VAT, CST cannot be claimed as an input
tax credit. So, when the distributor adds its own
margin to an already high landed cost, the total
cost for the retailer increases. Since the distributor will not like to give the same product at a
higher price to the retailer, the firm has to take a
hit on the margin.

ly located warehouses, the firms focus on saving

their margins. The above scenarios also show why
most businesses would prefer to source locally
and not through interstate purchases.

The above two scenarios clearly show that distributors will like to buy from a warehouse in
the same state rather than buying directly from
the firm in another state. This type of provision
in the current tax structure has forced firms to
locate warehouses in all the states where they
do business. Instead of focusing on supply chain
efficiency that can be generated from strategical-

In this case a firm can sell directly to the distributor in another state without paying the CST. The
calculations shown below verify that this would
not lead to any loss of margin for the firm and
distributors and retailers can enjoy their share
of margins without increasing the final price of
goods.

Future State
With the introduction of GST, the tax barrier on
cross-border sales will be removed. The tax disincentive of cross-border sales due to the presence
of CST will be eliminated. There can be two
scenarios by which the government can achieve
this task.
Scenario A: Complete Elimination of CST
Charged on Interstate Sales

Future State: Eliminate CST Charged on Interstate Sales

Supply
Chain Point

Landed
Cost (in `)

Margin
(in `)

Input Tax
Credit (in `)

Price Before
Tax (in `)

GST

Total Tax
(in `)

Final Price
(in `)

200

50

250

0%

250

Warehouse

0%

Distributor

250

20

270

4%

10.8

280.8

280.8

15

10.8

285

4%

11.4

296.4

Firm

Retailer

Scenario B: Elimination of CST But Interstate

Sale or Transfer Is Charged with Provision of
Input Credit
Lets assume that CST is abolished and interstate
sale is taxed with input credit allowed on the

subsequent sale. Even in this case the margins

for companies, distributors and retailers are
maintained without affecting the final price for
the consumer. This is depicted in the calculations
below.

Future State: Eliminate CST but Charge Interstate Sale or Transfer

Supply Chain
Point

Landed
Cost (in `)

Margin
(in `)

Input Tax
Credit (in `)

Price Before
Tax (in `)

GST

Total Tax
(in `)

Final Price
(in `)

200

50

250

4%

10

260

Warehouse

0%

Distributor

260

20

10

270

4%

10.8

280.8

280.8

15

10.8

285

4%

11.4

296.4

Firm

Retailer

The scenarios below clearly show that with the

advent of GST, having a warehouse in every state
where a firm does business will no longer remain
a necessity. The supply chain can be designed
purely on logistics costs and customer service
considerations and not on tax considerations. The
firms can now have fewer and more strategically
cognizant 20-20 insights

placed warehouses. The supply chain network

can be made leaner and smarter so that the
operational costs are minimized and efficiency
is improved. With the provision of the input tax
credit, each tax point in the supply chain will be
required to record, maintain and file tax transactions happening at that point. It is probably fair to

suggest that the longer the supply chain, the more

the tax points in the GST scheme of things and
hence increased compliance costs. The challenge
and the opportunity is thus to compress supply
chains for GST efficiency while ensuring that the
business objectives in and around supply chains
are also met.

GST Impact on Warehousing

In todays context, a firm spends large sums of
money in managing different warehouses to
overcome the fiscal regime. The presence of these
duplicate entities in the supply chain has added
to the additional cost of administration, utility
services and technology required to manage
these entities. The effect on cost of goods sold
(COGS) is further pronounced due to productivity

inefficiencies creeping into the system with the

presence of many smaller stocking points. The
logistics and inventory carrying cost of goods are
very high as firms carry more inventory to fulfill
demand and are handcuffed in selling products
across states. The tax regime has also proved
detrimental to the development of 3PL and 4PL
providers in India, adding to the logistics woes of
the country. India has one of the highest logistics
cost as a ratio of GDP (see Figure 2) compared to
other countries of the world. Also, transportation,
inventory and warehousing contributes up to the
70% of the total spend on logistics in India. All of
these costs are in some way impacted by a differential tax regime which promotes smaller and
multiple stocking points.

Cross Country Logistics Cost Comparison

Country

Logistics
Cost/GDP

Activities by 3PL/
Logistics Activities

Elements of Logistics Cost1

India, China

16-20%

<10%

US

9-10%

60%

11%

Europe

10%

30-40%

14%

Japan

11%

80%

9% 6%

Transportation
35%

Inventory
Losses

25%

Packaging
Warehousing
Customers Shopping

Figure 2

From a technology perspective, the implementation of ERP at multiple warehouses is a costly

affair, so most small to medium businesses in
India have stayed away from technology implementations that can result in long-term profits.
This has resulted in the proliferation of myriad
technology implementations in warehouses
and increased technology spends by firms. The
non-standardized modus operandi in these
warehouses also hampers the ability to bring
efficiency in people-related processes. There are
many more such inefficiencies that Indian firms
are living with due to the differential tax regime.
In a GST frame of things, logistics costs and not
tax considerations will play an important role in
determining the location of a warehouse. Firms
will move towards fewer and more strategically
located warehouses and this will entail combining
the existing capacities of warehouses or creating
new capacities. As simple as it sounds, the firm
has to prepare for various impacts and challenges
that this may bring.

cognizant 20-20 insights

First of all, fewer and larger warehouses may make

it feasible to route plant production directly to
warehouses rather than through hubs. Thus, the
size and number of hubs could be affected. While
consolidating the warehouses, the optimum path
for moving current inventory to the newly located
warehouses has to be worked out to reduce
the cost of manufactured goods movement. An
increase in inventory movement cost may impact
the price of goods directly. Once the firm decides
to move to fewer warehouses, the overall COGS
will come down. At current price levels, this will
entail more profits for the firm, and passing on
this benefit to consumers will positively affect the
demand for products.
With increasing demand for products and services,
the demand planning and management at newly
constructed or consolidated warehouses will have
to be reevaluated. Even if the demand planning
is perfected, the logistics costs associated with
delivery of goods will change. Firms have to

look for new optimization techniques which can

help them keep the current service levels and
save on logistics costs. To maintain the current
lead time with fewer warehouses, the firm has
to redesign the network by factoring in various
parameters that affect lead time. GST will foster
growth of 3PL and 4PL providers, and firms will
have to consider their services while designing
the distribution networks of the future. Fewer and
larger warehouses may even encourage adoption
of cross docking that can alter the way products
are handled in the warehouse. Advent of GST
may even change the customer perception about
a firms products. As the footprint (in terms of
warehousing) required for operating in the Indian
market will shrink, more foreign companies will
enter the market to do business. The competition
among foreign and national players will intensify,
resulting in an upsurge in customers demand for
high quality.

served in answering the following questions

before embarking on such a journey.

A thorough look at various aspects of a firm shows

that the impact of warehousing changes needs to
be accessed not just from a supply chain perspectives but also from technology and people perspectives. IT systems would need to be migrated,
aligned and upscaled for a robust performance in
the new world of larger warehouses. With fewer
warehouses to worry about, firms will be eager
to implement ERP solutions to achieve greater
efficiencies in operations. To enjoy economies of
scale, the firms need to move towards fewer technologies and better application rationalization.
Increasing scarcity of skilled labor and skyrocketing real estate prices will force firms to go for
automated, efficient and vertical warehouses. The
adoption of intelligent warehouse management
systems and innovative technology (e.g., iPad
applications for managing shelves and SKUs in
a big warehouse) to reduce human effort will
increase greatly. People will have to be retrained
in various operating procedures of the firm and
customer care has to be reevaluated during the
initial days of transition to new warehouses.
Organizations will have to undertake customer
education initiatives to help them understand
various changes brought about by GST. These
changes will in turn alter the ways in which
businesses are run.

Its quite evident by now that firms in India have

to consolidate their warehouses and redesign the
distribution network to remain competitive and
efficient with the advent of GST. As easy as it may
sound, the impacts of such a process are manifold
and ignoring any one of them may be detrimental for the distribution network and, in turn, for
the firm. A company needs to follow a methodical
approach for carrying out impact analysis on
current supply chain points. Once such an analysis
is done, a holistic solution can be built by keeping
in mind the business, people and technology
aspects of changes. The DOT Framework can
help firms navigate through such challenges and
redesign their distribution networks. The various
phases, activities and output of each phase are
shown in Figure 3.

What aspects of business, technology and

people will get impacted?

How to make sure that the future state fulfills

the current business objectives as well?

What external factors should one include in

doing such an analysis?

Once impacts are identified, how to drive them

to their rightful conclusion in the organization?

Even though the impacts of GST on a firms

business are numerous, a methodical approach
can help in identifying and preparing for such
challenges. Once the impacts are identified and
core business objectives are known, the firm can
use inputs from such an exercise to define and
redesign the future distribution system.

Approach to Network Redesign

The three phases of this approach help in the qualitative and quantitative assessment of different
aspects of a distribution network. At each point
of assessment it is ensured that new design not
only satisfies current business objectives but also
generates a feedback mechanism for continuous
improvement. The broad objectives of these three
phases are as follows:

Discover:

This phase helps in understanding a firms business, the external environment in which it operates and its capacity to
make changes. Since each firm is unique in
itself, this phase is a cornerstone for the other
phases and defines the future course of action
in a redesigning exercise. Another goal of this
phase is to derive insights into current supply

Moving different pieces of an existing supply

chain, which has been perfected after several
years of experience and optimization, seems
to be a daunting task. Changes to a warehousing network impact both tangible and intangible
aspects of a business. And a firm will be better

cognizant 20-20 insights

DOT Framework Redesigning the Distribution Network

Discover
Optimize
Transform

4 Weeks

8 Weeks

5 Weeks

Activity

Outcome

Understand firms business requirements and vision.

Gain insight into firms competition, vendors and consumers.
Identify firms readiness for change and key stakeholders.
Classify KPI/KPA and success factors that a firm identifies with its distribution network.
Benchmark success factors against industry best practices.
Organize workshops to analyze:
> Demand patterns, forecasting strategy and inventory management techniques used.
> Customer SLAs and associated delivery (logistics) mechanisms in place.
> Warehouse management techniques and supporting technology employed.
> Criticality of a stocking point in supply chain with respect to distribution,
taxation and capacity.

Requirement & Scope Analysis

Competition Analysis
Industry Analysis
Success Matrices
Stakeholder Analysis
Workshop Plan and Mind Maps
Demand & Forecasting Analysis
AS-IS Distribution Network
Analysis
Customer Analysis
Skill Assessment
Training Assessment

Ascertain firms business processes affected by redesigning the distribution network.

Build redesigned & optimized distribution network using inputs from first phase.
Generate rigorous what-if scenarios and network performance matrices.
Create business process impact matrices and redesign process flows.
Identify risk and associated mitigation plan to keep project on track.
Create implementation road map and key metrics to measure performance.
Produce detailed customer care and employee training manuals.

TO-BE Distribution
Network Blueprint
What-if Scenarios
Impact Analysis
Risk and Mitigation Analysis
Complete Implementation
Road Map
Training Manuals

Carry out necessary process & technology changes in accordance with implementation
road map and redesigned distribution network blueprint.
Run simulations on what-if scenarios and create performance matrices.
Execute change management process.
Implement user training and customer awareness programs.
Monitor adoption & measure KPI/success factors continuously to ascertain
solution effectiveness.
Perform market scan/survey to identify effect on competition, customer
SLAs and firms performance.
Fine-tune solution using market scan and KPI data.

Simulation Analysis
Training Feedback
Learning Document
Change Management Analysis
Performance Matrices
Adoption Matrices
ROI Document
Market Scan Analysis

Figure 3

chain strategy and supporting processes. The

aim is to highlight shortcomings, strengths and
areas of improvement in the existing distribution network to better fulfill the future needs.

Optimize:

The objective here is to create a

blueprint of the future distribution network
while keeping in mind factors such as efficiency,
scalability and flexibility. Various parameters
and what-if scenarios that characterize a distribution networks effectiveness are defined in
this phase. No stone is left unturned in defining
the future processes that will lead to employee
and customer satisfaction. In short, the entire
road map that defines the future state is built
here.

Transform: The intention here is to bring new

business processes in practice and redesign

the distribution network according to the
implementation road map. This phase may
involve shadowed phase-out, upgrade or
replacement of current distribution network
pieces. This phase also characterizes testing
of what-if scenarios, measuring various KPIs
and executing change management processes.
Transformation is accompanied by the creation
of a continuous feedback mechanism that

cognizant 20-20 insights

leads to further fine-tuning of the distribution network. The new network is continuously
benchmarked against best practices to gain
efficiency.

Conclusion
A common tax structure for goods and services
in India is necessary for improving supply chain
efficiencies and rationalizing business objectives.
The only question that needs to be answered
is when this will become a reality. Whenever it
happens, it will come with a set of challenges that
if addressed at the right time can take businesses
to new heights. Our strong consulting expertise in
the areas of supply chain sourcing, planning and
execution can help firms in moving forward with
confidence and embracing GST with ease. We can
help with every aspect of distribution network
redesign, from analyzing the existing supply
chain points to designing an optimized network
to implementing the new model. We also have
vast experience in streamlining IT processes and
creating future IT road maps for consumer goods
firms. Our delivery model ensures that all three
aspects process, people and technology are
honored while driving change in the firm.

Footnote
1

The Indian Logistics Industry 2006, N. Viswanadham, Center for Global Logistics and Manufacturing
Strategies, Indian School of Business.

References
1. GST Reforms and Intergovernmental Considerations in India, March 2009, Department of
Economic Affairs, Ministry of Finance, Government of India.
2. Goods and Service Tax: An Introductory Study, April 2007, Sudhir Halakhandi, The Charted
Accountant.
3. How GST impacts Your Business, 2010, Ernst & Young.
4. Understanding GST, 2010, Ernst & Young.
5. The IT Strategy for GST, July 2010, Nandan Nilekani, Empowered Group on IT Infrastructure on
GST, Government of India.
6. GST Alert: India Update, Dec 2009, KPMG.
7. Supply Chain & GST, Sept 2009, PriceWaterhouseCoopers.
8. GST: Impact on Supply Chain, Anil Rajpal, Sachin Jagtap, Technopack Consulting.
9. Supply Chains of Asia: Challenges & Opportunities, 2002, Accenture.

About the Authors

Chandrasekar Ranganathan is a Manager in the Consulting Group. Chandrasekar has over 17
years of experience with over 12 years in business/IT consulting including seven years of project/
delivery management. Some of Chandrasekars consulting assignments include business process
reengineering, SAP and SOx solutions, business case validation for supply chain redesign, IT
strategy and road maps for M&A, and business transformation planning. He has completed a certification program in global business leadership offered by U21 Global. He can be reached at
ChandrasekarViswanathan.Ranganathan@cognizant.com.
Jiten Jain is a Senior Consultant currently working in the Consumer Goods Department of Cognizant
Business Consulting group. Jiten has expertise in claims and rebate management, order management
and trade promotion management with an emphasis on supply chain planning and execution. He has
consulted for Fortune 500 consumer goods and manufacturing clients in business blueprinting, business
process reengineering, requirement analysis, portfolio rationalization and project execution. Jiten has
an MBA in information management from the S. P. Jain Institute of Management and Research, Mumbai
and a Bachelor of Engineering in computers from South Gujarat University. He can be reached at
Jiten.Jain@cognizant.com.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50
delivery centers worldwide and approximately 137,700 employees as of December 31, 2011, Cognizant is a member of
the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing
and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.

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