Dr. Shampa Nandi, Faculty, ISME
“A consignment crossing four states takes 3 to 6 hours to pass interstate check posts which means 20 hours have been lost in transit”—PC Chandra, CEO, TCI Express
“A company selling goods at Hosur (Tamilnadu), only 30 Km from Bangalore, stores goods at Chennai warehouse which is 250 Km from Bangalore, rather than at Bangalore warehouse to avoid CST (Central Sales Tax). CST has to be paid for Interstate transportation of goods for selling but not required for stocking.”
“I believe, transportation will be more efficient and turnaround time will be faster” –Varun Berry, MD, Britannia Industries.
The above three statements depict the current situation of Indian logistics and the expected benefits from the GST, a uniform tax system, often referred as a game changer. This article is all about the impact of GST on logistics, one of the major unnoticed beneficiaries of GST.
Current Scenarios of Indian Logistics System
Logistic is regarded as the backbone of any economy, as all other commercial sectors depend on the efficient and cost effective supply of goods. Logistics cost is impacting the price of any products or service as well as the profit of any company across industry. Indian logistics system is growing at around 12-15% annually, expecting to reach a worth of $307 Billion by 2020. India spends around 14.4% of its GDP on logistics due to its inefficiency whereas any developing country spends less than 8%. Report says India can save up to $50 billion if logistics costs can be reduced by 9% of GDP. The current bottlenecks are poor road condition, check post delays, old vehicle fleet, unorganised local players which resulted a maximum of 250-400 km coverage in a day against 700-800 km travelled in western countries. Due to current differential state tax system, check-post at state boarder scrutinise each and every consignment for location based tax compliance. State and central agencies, forest department have the right to stop vehicle for checking papers related to VAT, road permit licences and other documents. A study done by IIM –Kolkata and TCI, the major logistic giant has found out that additional fuel consumption due to stoppage and slow speed of vehicle actually reduced the GDP by 12 billion dollars every year. For the past few years freight costs are increasing continuously, for heavy industries like cement, steel industry logistics cost is one of the biggest burden. Even for FMCG industry where freight charges are comparatively less, logistics cost holds for 5% of the annual sales. In logistic road transportation is most inefficient mode of transportation.
GST at a glance
Goods and service tax, an indirect tax is charged on manufacture, sale and consumption of goods and services. Instead of collecting Central taxes (Excise duty, Service tax, Additional Customs duty, Surcharges & Cesses) and State taxes (VAT/sales tax, Entertainment Tax, Entry tax, other duty and taxes (Luxury tax, tax on lottery/betting), GST is a unified value added system of taxation would be levied at every point of supply chain. Aligned with the Governance structure of India GST would be levied simultaneously by the Centre and the State. With a single rate (in four slabs- 5%, 12%, 18%, and 28% for different items or services) being applied to all goods and services, there will be reduction in taxes on manufactured goods and prices of products and services would be reduced. With the implementation of GST, manufacturer would be getting a tax credit for all services present in the supply chain starting from input materials to reaching to final consumers and enable manufacturer to realize higher margins. With the initial hurdles of implementation being over, it will improve the operational efficiencies, change the way industries operate, bring down the price of the products. Also the overall amount of tax collection will be more in spite of reduced tax rate, but for more number of assesses and overall GDP is expected to be added by 1-1.5%.
Impact of GST on India’s Complex Logistic Network
GST will enable logistic and distribution system to evolve into more efficient, customer centric and more consolidated system. Organisation will be able to experiment with different types of distribution models, more number of national (in a true sense) transporters will come up and mother warehouses and regional distribution hubs will step in instead of fragmented carrying and forwarding agents and local transporters. In India, around 90% of the transporting vehicles are owned by individual owners and there are no government regulations regarding size and capacities of the trucks. Currently there are 720 dimensions of truck bodies are playing on the road and same truck body is converted to different specifications depending on the types of goods. With the implementation of GST and improvement of road conditions trucks’ tonnage capacity will increase and more standardization would be adopted. Companies who will be the first mover in GST implementation will be having added advantage on cost and services over their competitors. Companies could be benefitted as the inventory cost and inventory carrying cost will be reduced and that amount can be invested further to improve services. Expected benefits from GST on logistics would be manifold—
- Company can depend more on cheaper sources of raw material from other state.
- Improved scope for price negotiation.
- Accurate forecasting and improved inventory management.
- Improvement on customer service at reduced cost
- Capacity expansion and greater flexibility in manufacturing and operations.
Another significant change is expected in the warehousing segment in post GST era. Currently most of the warehouses are owned by Government. Only 18.9% of warehouses are owned by private sectors. The rests are owned and operated by FCI (Food Corporation of India), CWC (Central Warehousing Corporations), SWC (State Warehousing Corporations), Co-operative sectors and State civil services. Manufacturing companies prefer to stock goods at warehouses of each and every state they operate other than the state of origin just to avoid the central taxes which are not credited back to manufacturer. Warehousing facilities ae being utilized for more on tax savings rather than improving operational efficiencies. Current GST system of taxation will generate a pull based supply chain with more consolidated warehousing facilities. This will bring economies of scale as the operational expenses will go down. More need based large warehouses will be set up strategically located using optimization and definitely it will reduce the cost. At the same time customer would be getting delivery faster. As the number of redundant layers of warehouses will be eliminated, the associated paper work, cost on IT in terms of ERP deployed in each warehouse will be reduced substantially. Moreover, sophisticated, state of the art technologies can be implemented in larger warehouses which was not feasible in smaller scattered warehouses. Better planning and forecasting will lead to better control and reduced level of inventory and cases of stock outs. Modern warehouse management system with robotics could be adopted to bring efficiency and effectiveness in logistics network. A large amount of investments is also expected in real estate sector to grab this opportunity.
Conclusions
Excitement around GST is huge, expectations are high, enormous changes for everyone are expected but the gains and efficiencies are yet to be proven. Some chronic challenges in country’s huge transportation will still remain. The introduction of “e-way” bill is raising a question on the free movement of the goods and services. According to “e-way” bill before sending any consignment worth of more than Rs 50,000 the company has to register online and collect the bill, which gives permission to Tax officers to inspect the shipment anytime during transit to check tax evasion. Benefits of GST can be reaped only through its proper implementation. Only time can answer.
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