Author: Shashank Verma | Head Supply Chain & Order Management | Maier+Vidorno
First published in April 2016
“India” a Trade Link to the Mideast & Europe
India enjoyed a special status as far as trade with the world is concerned between the 11th and 18th centuries when trade was very active and India experienced great prosperity through trade. At that time India’s exports far exceeded imports, both in terms of the number of items as well as in volume. The chief products imported into India were horses, dry fruits and precious stones, whereas chief articles exported from India were textiles, sugar and spices.
Understanding the place of India holds historically helps us also see the need to understand how distribution takes place in India today.
Distribution in India can be broadly categorized within following channels:
- Manufacturer -> Distributor -> Dealer -> Customer
- Manufacturer -> Dealer -> Customer
- Manufacturer -> Retailer (Trade Hubs like Shopping Malls) -> Customer
- Manufacturer -> Company’s Stock Point -> Dealer -> Customer
- Manufacturer -> Company’s Exclusive/Own Trade, Store -> Customer
Noticeably, in all these channels two components hold their respective importance and can never be compromised within the value chain: the Manufacturer and the Customer.
While some manufacturers want to serve customers directly, others want to develop their supply chains by introducing distributors, dealers and retailers. Both models have a place while drafting the distribution network of any enterprise.
The dilemma that new enterprises in India encounter working out their distribution network is how to cover the large and dispersed customer base of India, be compliant with the law and at the same time be as economical as possible – especially considering the price sensitive nature of Indian market. In defining the right distribution network for each company there are some common critical aspects that need to be understood:
- The product(s), the markets for these products and the effect on price
- Interstate Sales add to the cost
- All the applicable Tax Rates
The product, the market and the effect on price
Considering the large Geographic size of India and its diversity, it is difficult for any enterprise to assess its product placement in the right market. Manufacturing takes place in clusters or ‘colonies’ (for example the Automotive Industry mainly produces in pockets between Haryana and Maharashtra and in Tamil Nadu) and such set ups define the location of the industry, even when the customers are scattered all over the country. This increases logistics cost of products on the one hand, and adds the ‘channel base’ distribution on the other. Dealers and Distributors are expected to invest additionally in the business of getting the items to the right places, making the product expensive and non-competitive. As all enterprises have to undergo similar situations, end customers land up in paying higher price of the product.
Interstate Sales add to the cost
‘Channeled distribution’ makes the product expensive, not only on account of handling goods, but by means of additional tax burden and administrative cost.
Due to the ‘structured industrial colonies’, goods movement has specific tax rates, commonly known as “Central Sales Tax”, which if charged at the ‘Concessional Rate’, results in making the product 2% more expensive if goods are sold to the channel partners like Distributors and Dealers. Additionally, the administrative cost of handling such interstate movement goes up, due to ‘State Wise’ requirements for road permits.
Applicable Tax Rates
Value Added Tax Rates vary between states, sometimes based upon shortfall in revenue, thus the tax is increased by means additional surcharge or due to tax exemption extended by the local State Government in order to generate employment or reduce tax to promote local (state) industry, by virtue of excessive indigenous availability of goods.
With all these different issues to consider while deciding the best distribution arrangements, it is really important for companies to be aware of the applicability of which taxes, in order to keep their products within in the reach of customers – both in terms of availability and price.
Navigating the regulations is an art – but one based on in-depth knowledge of rates and regulations, and experience of practical distribution flows, transport companies and routes. Just like in the days of the great trading routes through India it takes skill and knowledge to make the most of the enormous opportunities of India’s vast markets and geographical connectivity.
M+V pioneers in designing the appropriate distribution channel, with the help of its experts and suggest ways by which your product lands up to your customer in the right quality at right time and at the right price. Contact us for more information!