Logistics industry set for a smooth ride post-GST
While the entire dynamics of transportation and logistics will undergo a sea change once GST is introduced, it will lead to a leaner and fitter logistics industry, which in turn will lead to greater efficiencies.
Surya Kannoth & Reji John
Goods & Services Tax (GST), for sure, remains one of the two bold-play initiatives taken by the reigning government so far. After years of being entangled in political knots debating a transparent and efficient unified tax system, India is soon on its way to become a clutter-free tax highway.
"It (GST) looks on track. Subject to Parliament approval, it looks like the possible date of implementation of GST is July 1," Finance Minister Arun Jaitley said after the 11th GST Council meet concluded.
The three enabling GST bills – Central GST, Integrated GST and Compensation to states top the government’s agenda during the second part of the Budget session of Parliament, which will conclude on April 12.
India’s logistics performance at its key international gateways has scaled up significantly in the last two years and that was evident in the World Bank’s biennial measure of international supply chain efficiency report namely the Logistics Performance Index where India’s ranking catapulted from 54 in 2014 to 35 in 2016.
The introduction of GST will further give impetus to the transport and logistics industry in India. While the entire dynamics of transportation and logistics will undergo a sea change once GST is implemented, it will lead to a leaner and fitter logistics industry, which in turn will lead to greater efficiencies. Both transport as well as manufacturing companies will be able to take better advantage of the economies of scale.
Lauding the government’s move, Pirojshaw Sarkari, CEO, Mahindra Logistics said, “The announcement of GST Council finalising its recommendations on almost all issues and timely preparation of IT system needs to be welcomed. In an endeavour to create awareness about the new GST led taxation system, we support the government’s move to reach-out to trade and industry.”
Budget 2017-18 pushes for infrastructure Readying the stage for GST, Jaitley’s Budget proposal for 2017-18 laid special focus on road and infrastructure sector. The Budget allocation for highways was increased from Rs 57,976 crore in FY2016-17 to Rs 64,900 crore in FY2017-18 while 2,000 km of coastal connectivity roads have been identified for construction and development. This will ensure better connectivity with ports and remote villages. The total length of roads, including those under the Pradhan Mantri Gram Sadak Yojana (PMGSY), built from 2014-15 till the current year is about 140,000 km, which is significantly higher than previous three years.
With an eye on improved logistics across the country in the future, the finance minister said, “An effective multi-modal logistics and transport sector will make our economy more competitive. A specific programme for development of multi-modal logistics parks, together with multi-modal transport facilities, will be drawn up and implemented.”
Advantage for 3PL providers Implementation of GST will ensure that the nascent 3PL further embeds itself in the logistics space. Market research agency Novonous in its recent report estimates that 3PL logistics market in India is expected to be worth $301.89 billion by 2020. By 2020, Indian logistics market is expected to grow at a CAGR of 12.17 percent primarily driven by the growth in the manufacturing, retail, FMCG and e-commerce sectors. This growth rate is also based on the expectation of GST being implemented and the logistics companies can optimise their operations to reduce cost and increase their margins.
Further, it is the implementation of the GST that would increase productivity and raise efficiency levels in the logistics sector and the economy as a whole. According to various industry estimates, freight times will come down by 30-40 percent and logistics costs are expected to reduce by 20-30 percent.
Once GST is implemented, instead of maintaining smaller warehouses in each and every state, the companies will be setting up lesser and bigger warehouses, and can follow hub and scope model for freight movement from warehouses to manufacturing plants, distributors and retailers.
“With GST in place, there will be consolidation of warehouses, thus reducing the time lost between transporting from one warehouse to another. Shorter supply chain cycles will entail lesser time spent on unnecessary activities like paperwork, material scrutiny at checkpoints, compliance with multiple regulations, etc. This will make it smoother for transport companies as they will be able to transport goods with lesser stoppages and breaks in journey. Consequently, it will reduce the need for extensive documentation in inter-state sales, making it a lot easier to transport goods than it is currently,” Allcargo Logistics posted on its blog.
Therefore, there lies a bigger opportunity for the 3PL service providers who can manage these bigger routes and deliver accurately and efficiently. The Indian logistics industry constitutes around 14 percent of the GDP which is greater than the other developing nations. The 3PL logistics firms are evolving from traditional service delivery systems to highly integrated and technically equipped service providers striving to meet the service demands. GST provides them with ample opportunity to invest and expand the 3PL base in India.
According to a report by CARE Ratings, post GST implementation the 3PLs would have to restructure its assets and realign its operations in line with changes in the operations of its customers in the new scenario. Currently, 3PLs have warehouses located near major distribution centers of its key clients (different industries) irrespective of its geographic disadvantage mainly to avoid interstate taxes. However, post GST implementation, 3PLs are expected to build integrated warehouses at logistic suitable locations. So accordingly, their assets would need to be restructured to accommodate the long distance consignments which will occur with this scenario of free movement of goods across the country. The consumer durables sector is expected to witness maximum drop in the logistics costs as percentage of total sales, as their warehouses are built at different states to avoid interstate tax.
The central taxes which will be subsumed into the GST are: Central Excise duty, Additional Excise duty, Service tax, Countervailing duty, and Special Additional duty of Customs. Also, the state taxes which will be subsumed by GST are: Sales tax, Entertainment tax, Central Salex tax, Octroi and Entry tax, Purchase tax, Luxury tax, and Taxes on lottery, betting and gambling. GST will be collected at every stage of sale or purchase of goods or services, based on input tax credit method. This simplification of the taxation system would make the inter-state transportation of goods more efficient.
Impact on Supply Chain Management The structure of the supply chain is influenced by differential taxes based on geographical location. By eliminating multiple state taxes, the logistics companies are encouraged to consolidate their warehouses instead of maintaining one in each state to avoid central tax.
The following table illustrates the expected benefits that logistics industry would derive post implementation of GST
This in effect brings the overall cost of the product down as the inventory cost and inventory carrying cost is down. This directly affects the final cost of the product bring the selling price down. The cost saved by the companies as a result of GST can be used to invest further to improve serviceability.
One important highlight that GST’s implementation will do is to reduce the time taken at various check posts while transporting goods. This, in turn, will reduce costs for customers and logistics companies, making the latter more efficient and profitable. Presently, trucks are idle for about 40 per cent of the total travel time due to Central Sales Tax/Octroi payment.
GST has the potential to accelerate growth in the logistics industry. While industry pundits still feel that many contentious issues remain, such as the clear definition of supply, supply chain management through warehouse engineering, credit allowance during the transition phase etc, there is general consensus to welcome this new tax regime.
With GST’s imminent implementation, the logistics industry should start exploring different supply chain models with their clients and at the same time develop a completely synchronised ERP accounting system to support inventory supply management as required under the GST regime. Nevertheless, GST is still the change the logistics industry is eagerly awaiting as overall, the positive impact of GST far outweighs the disadvantages for this industry.
