Corporate India is taking a long, hard look at its distribution network and evaluating the possibility of reducing links in the distribution chain, as the value added tax and a lower central sales tax regime come into force on April 1.

Industry analysts say that the introduction of VAT could lead to the pruning of the distribution chain on a case to basis.

In a VAT regime ideally all the channel partners in the distribution chain -- wholesalers, retailers and stockists -- have to be VAT compliant. Otherwise this has legal implications.

In such a situation, it makes sense for companies to drop channel partners that are not VAT compliant, leading to an automatic pruning of the distribution chain.  Also, in the case of distribution chains  that are spread across states, the manufacturer runs the risk of losing out on input credit.

"This is another reason for pruning the distribution chain," explains a senior executive at a consultancy firm. Indeed, most manufacturers who had employed clearing and forwarding agents or had sales depots in all states to avoid paying central sales tax are likely to shorten the distribution chain, as CST has been reduced to just two per cent and is likely to be waived completely in the future.

Industry sources said that if CST is waived, it no longer makes sense to have a sales depot in each state.

So against the current practice of having a warehouse or a sales office in every state, companies may in future put in place a mother depot in a region, which will then directly supply to the dealers or distributors in each state, in order to reduce manpower and administrative costs.

Sanjay Jain, country managing director, Accenture, said, "Most corporates, especially liquor and fast moving consumer goods companies, will have to take a relook at their distribution channels to bring down their total delivered cost. Companies may now need to optimise the location and number of warehouses they have in various states."

While most companies are studying the draft proposals for VAT implementation by different states, a few have already set the ball in motion.

Glenmark Pharmaceuticals has decided to supply drugs directly to its distributors in different states, instead of feeding goods to its C&F agents, like it used to earlier. So C&F agents could wind up losing a lot of business from the pharmaceutical industry.

A S Mohanti, director (domestic formulations), Glenmark, said, "We are one of the first companies to have decided to make changes on the distribution side. Owing to VAT and the reduction in CST, we have decided to supply our product directly to distributors in states to save on tax and other overheads."

N Santhanam, chief financial officer, Nicholas Piramal, said the company is currently awaiting a report from KPMG to suggest changes that need to be made on both the supply and the distribution chains.

Bajaj Auto's vice-president (finance) Sanjiv Bajaj said the company was also studying the states' draft proposals to take a call on the future course of action.

Meanwhile, Ficci (Tamil Nadu) has urged the state government to grant 45 to 60 days to companies to attune their systems to the value-added tax regime, since most of them have implemented enterprise resource planning solutions.

The chamber, which has welcomed the state for notifying the draft of VAT Bill, said that central sales tax will pose a problem for the industry, though it is proposed to be phased out gradually.

In the VAT scenario, no input tax credit is available in respect of tax paid on CST purchases and the additional burden would make industries in Tamil Nadu less competitive, Ficci pointed out.