GST - How will it change the dynamics of the Logistics industry in India

The logistics and transportation industry in India is worth $130 billion annually, and contributes to 4.7per cent to the country's GDP. However, it is mostly unorganised and fragmented due to different tax structures at the state level.
GST

The business community of India finally breathed a long held sigh of relief as GST(Good and Services Tax) bill was passed in the Parliament. A country divided by different taxes pertaining to each state and the central government, a uniform tax structure is definitely something to cheer about.

What is GST?
GST is one of the biggest indirect tax reforms in India since liberalization and is expected to bring an economic integration in the nation’s economy. It will help streamline and consolidate indirect taxation.

GST would be payable on the ‘transaction value’ – the price actually payable or paid by the customer at the final point of consumption. Taxpayers will pay one consolidated tax, which means, it will replace the taxes applied by the Central (Excise Duty, Additional Excise Duty, service tax, Countervailing or Additional Customs Duty, Special Additional Duty of Customs, etc.) and State (VAT/sales tax, purchase tax, entertainment tax, luxury tax, octroi, entry tax, etc.) Government taxes, and there will be only national-level central GST and a state-level GST across the entire value chain for all goods and services, barring a few exceptions.

Now, apart from making the taxation structure simpler; minimizing cascading effect of taxation; simplification of tax administration and compliance;and harmonizing tax base, laws and administration procedures across the country, the GST is expected to impact a wide range of industries including automobile, consumer durables, FMCG, cement, entertainment, media, textiles/garments, furnishing and home decor, pharma, telecom, IT and ITes, metal, banking and financial services, and logistics. However, it’s the logistics and transportation sector is the one that will witness a major transformation, owing to GST.

The current scenario of the logistics industry
The logistics and transportation industry in India is worth $130 billion annually, and contributes to 4.7per cent to the country’s GDP. However, it is mostly unorganised and fragmented due to different tax structures at the state level. The logistics industry encompasses important operations like transportation, warehousing,pool distribution and logistics optimization, that support the business and the economy. However, due to the current interstate tax regime, the logistics industry faces several challenges:

Multiple taxing - Currently, every Indian state (all 29 of them) and union territory (all 7 of them) taxes goods that move in and out of their borders at different rates. Consequently, the goods that move across the country are taxed multiple times.

Truck delays – According to a Ministry of Road Transport and Highways (MORTH) study, an average truck spends nearly 16 per cent of the time at interstate checkpoints and city entry points, as state authorities track and inspect goods, and apply inter-state sales taxes.As 65 per cent of the freight moves by road, this delays the movement of goods resulting in delayed deliveries and increased product cost to the end customer.

Longer supply chain – Due to the complex tax structure on the crossing of border checkpoints, organizations are required to either set up warehouses in every state or increase the frequency of transport of goods, which disrupts the supply chain, making it longer and inefficient.

Waste of time and resources – The present structure requires the transporter to carry the hard copies of the invoices and forms. The transport industry ends up spending almost 50-60 per cent of its time and resources on tax compliance.

Cost gap between the players – Several large players are able to avoid tax under this unorganized sector, while many small players don’t. It leads to a cost gap between them and the organised players.

A costly affair for nation - India spends around 14.4 per cent of its GDP on logistics and transportation as compared to less than 8 per cent spent by the other developing countries. Indian startups and e-commerce companies spend as much as 30 per cent of their net income on logistics.

How GST Bill will impact the logistics industry in India?
Under the GST amendment, not only there will be a simpler and uniform tax structure, but also elimination of inefficiencies making interstate transit of freight easier, cheaper and less time consuming.

Efficient transporting
With the GST bill, the transport industry will greatly benefit. According to CRISIL analysis,GST will reduce the logistics cost for the companies producing non-bulk goods by as much as 20 per cent. Lesser interstate review and compliance, and reduced paper work, will lead to a reduction in idle hours, lower transit time, quicker turnaround time, an increased uptime and a higer truck utilization.

According to a recent survey by Nomura (a brokerage and research firm), if the waiting time of trucks is reduced by 50 per cent, it would add 8 per cent additional trucks on the highway. This will push demand for high tonnage trucks and result in reduction of transportation costs. The seamless movement of goods in and out of states will accelerate demand for logistics services. Also, reduction in delivery time would lead to reduction in distribution costs by 10-15 per cent, thus lowering the final cost of the goods.

The transport industry will get a more organised and specialised structure leading to organised trucking and more efficient sourcing. There will be main or principal transporters connecting the manufacturing units to the warehouses. The secondary or subsidiary transporters will move goods from the warehouses to the distribution centers. Finally, the last mile transporters will take care of the doorstep delivery of the customers.

Optimised warehousing structure
As the warehouse industry in India is estimated to be at INR 560 billion and is growing to be at 10 per cent every year, GST bill will have a huge implication on it.

Tax will be levied on stock transfers and full credit will be available on interstate transactions. Thus, organisations need not set up warehouses in each state, so that they could transport the goods to the warehouse first, and then sell to the distributor.

With the implementation of GST, organizations can build fewer but larger (hub) regional warehouses, closer to their manufacturing units or distribution points, that can serve bigger markets. For example, a hub warehouse in Delhi can serve the entire North region, while a hub in Ahmedabad can serve the West region.This will make the whole logistics chain more focused, leaner and concentrated.

Emergence of organized players
Due to a uniform tax structure, more organized service providers will come into the picture. The unorganised players will need to join hands with the organized players to set up economies of scale, leading to redcued cost competitiveness of the players.

India has witnessed a 7.9 per cent GDP growth overtaking China’s. This new tax law could result in a 2 per cent growth in the GDP. As the GST rate is yet to be disclosed, the final impact will be realised only after that. However, GST will unleash a new era of developing transport and logistics infrastructure in India, and will lead to a more competitive and optimal structure.

Authored By: Sanjay Bansal, MP & Founder, Aurum Equity Partners LLP

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