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Central sales tax: A major supply chain bottleneck
July, 28th 2006

Manufacturing sector has now growing at double-digit rates after clocking a high growth in the last few years. A prompt response from various state governments to this buoyant growth has been to increase the permits, forms, transit passes, and commercial taxes check points. Surely the government needs to keep a close tab on the trade flows and monitor their cash cow. But it would have been a lot better if they were to spend more time, manpower and resources on bettering the supervision and support systems and the infrastructure back up instead of simply going the conventional method of increasing checkpoints.

Probably they can learn a esson from the electronic clearing system recently launched by the Indian Customs. With Indias trade burgeoning in the last few years they took a more logical step of ensuring a swifter clearance of customs formalities rather than create increased customs points, more manpower and so on. So the problem is more of the different mindsets. So my question is why is it that a registered dealer cant go to the commercial taxes department website, and through his TIN number and password simply download the form required which could be bar coded. The computers at the checkpoints could simply scan the form to check its authenticity.

Prior to VAT implementation, we felt a need of customizing supply chains of various organisations along the lines of LST/ CST jumble. To avoid a 4% CST and other procedural problems like the large number of forms and permits, organizations created 20 - 25 warehouses across India, which would then sell goods locally within the state. Thus these organizations were forced to create inventory points at a large number of places and sometimes even in close proximity to each other. For example, for serving Delhi one warehouse, for Noida/UP another one, for Haryana/Gurgaon another, for Chandigarh another, for HP yet another, and so on. The result of this state depots overdrive was that a lot of companies have six to eight warehouses within a radius of 300 - 350 km, which is logistically incorrect. Compare a scenario where an organisation, ideally, has one warehouse in North India and is capable to ship and deliver within 24 - 48 hours to a radius of 350 km and does not have to collect forms/ permits from each and every one of the distributors/ channel partners. The channel partner does not have to wait for weeks to get a few forms/permits issued to him and buys piecemeal from the organisation, as and how he likes. Compare this with another organisation that has to operate six warehouses to cater to the same 350 km radius and has to manage that many more staff, incur higher inventory holding costs and also increased wastage apart from higher logistics costs. Add to this higher warehouse insurance costs and loss due higher material handling. In this scenario the channel partner who has to fetch permits from the department, creates a market condition demanding local billing, so as to save permits for out of state procurements of crucial items.

In most cases there is zero value-addition at this stage of the supply chain. Post VAT, we were optimistic about a faster rationalization of CST so that it would be possible for companies to shift to regional stocking instead of state wise stocking. But it is still not sure how long this process would take as the CST roll back is stymied is caught in the politics between the center and the states. The sooner it is resolved the better is it for the industry and trade.

The writer is chairman cum managing director, Safexpress Pvt. Ltd

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