Logistics: The ride gets better with GST
Posted by: Afsal T I | Logistics
Logistics is the back bone of Indian industry, especially for manufacturing and e-commerce industry. Logistics includes movement and storage of goods, flow of information and value added services etc. The main functions of logistics involve transportation, warehousing, inventory management, order processing, packaging, outsourcing, and material handling. Indian logistics industry can be divided into four segments: Transportation – 60% (Road – 36%, Rail – 19%, Water – 5% and Air – 1%), Warehousing – 25%, Freight forwarding – 10%, and Value added logistics – 5%.
The Indian logistics industry is showing continuous growth due to enormous growth in e-commerce, GST 2017, upcoming AAI projects, ports developments (Sagarmala Project), government initiatives like Make in India, NILP, and NHAI developments, 100% FDI in warehouse and maintenance development and national integrated logistics policy. It was reported that Indian logistics industry is expected to grow 300 billion USD by 2020 and 12.17 % CAGR by 2020.
A truck in India covers annual distance of 85000 km compared to 150000 in foreign countries. Higher logistics cost and complex tax procedures are the two major challenges faced by the logistics industry today. Goods and service tax will reform the complex tax procedures part from now onwards.
GST (Goods and service tax), an indirect tax was implemented in India in July 2017. x. This tax is applicable on manufacture, sale and consumption of goods and services. This tax has made a revolutionary change in India since the market is unified with the motto of one nation, one tax. In pre GST both central and state taxes sums up to nearly 27% on goods. After GST it came down nearly 19 to 23% and reduced the risk of interstate tax activities.
Logistics is one of the main industries which are highly benefited from GST. The positive impacts of logistics on GST are many. A few of them are discussed below.
Warehouse and freight consolidation:
In pre GST era companies had warehouses in every state because of the risk of tax compliances. The warehouses were running with less than their capacity but they maintained it just for the sake of interstate tax reduction. Now GST help the companies to plan their consolidated warehouse system in well established cities instead of small and many warehouses in all the states. This helped all the supply chain participants who can move and store goods, routing and demand planning easier. Later many companies (including e-commerce) planned their consolidated warehouses in tier 1 and 2 cities. Nagpur is considering as the zero mile area point for logistics operations, especially for warehouse setup, it can connect with 4 regions very easily. McDonald is one of the examples who already planned their central warehouse in Nagpur.
Wiping of Interstate tax burden
In pre GST era logistics industry spend nearly 50 to 60% of its time and resources on tax compliances and other activities due to truck queue at interstate check points and checking of interstate sales tax. Currently as India is running with one nation one tax motto, there is no interstate points for documents checking and tax collection, This is the another advantage for logistics industry after GST implementation. GST tax will be levied on transportation of goods and full credit option will be available on interstate transaction.
Initially warehouses were set up across states to avoid paying 2% corporate sales tax and phasing out of interstate sales tax. Logistics costs are expected to be decreased by 1.5 to 2% of sales since there will be a reduction in inventory cost due to warehouse optimization. The movement will happen very fast and accurate and at the same time big logistics players can expand their chain across India.
Logistics operation time reduction (Lead time)
Logistics operation lead time and logistics infrastructure are the two major issues currently facing by the logistics industry. GST is set to make tremendous level of reduction in the operation timings. After GST implementation, interstate tax burden and interstate check points are eliminated. Trucks are not needed to wait for the interstate clearances and other document related works and it will make effective 20 to 23 % speed and accuracy in operation timings. It will also reduce the total supply chain lead time also. In pre GST trade barriers such as octroi, entry taxes, entry passes, made vehicles to wait in a long queue for long hours. As per the World Bank report after GST implementation 30 to 40 % of cost can be reduced by non stoppage of vehicles across the state boundaries. It will also increase truck annual coverage of 85000 km to further good figures; nearly 15 to 20% improvements. The new NHAI EPC system in the area of infrastructure will also improve the system much faster.
Transformation of Logistics sector from unorganised to organised
With effects to the GST implementation logistics sector is transforming from unorganised to organised sector. Government has made several policies and regulations for starting and reframing the logistics companies. Industries which deviate from following these regulations will be eliminated from the market completely.
Strong penetration of 4PL concept in India
With effect to the GST 4PL concept is going to get widened. Currently 3PL players are ruling India. With the effect of GST, market is unified and also there is no barrier of inter tax burdens, check post compliances and other formalities. This will enhance big logistics players to widen their market across the country. This team can manage the entire supply chain solutions without any barriers after GST implementation. 4PL service can consolidate their warehouses and stocks that will bring the overall cost of the product down as the inventory and carrying cost down.
Positive impact on supply chain
After the implementation of GST, customer service and logistics cost are driving the supply chain design. It also offered companies to improve their accuracy of demand forecast. Small warehouses will be merged into bigger warehouses; so it can lead to space optimization. Capacity expansion, flexibility in manufacturing, better inventory management, and interstate sourcing of raw materials are the other major areas which will get benefit out of GST.
As discussed above there are many positive impacts after GST implementation in India. Some more points are listed below.
Seamless movements across state borders
Vehicle idle time reduction pushing for transport efficiencies
Production process will strengthen with efficiency and product improvement.
Logistics Start-ups like RIVIGO, Black buck and others can use this opportunity and expand their operations effectively.
Logistics concepts like cross docking, milk run can be practiced smoothly.
Undoubtedly logistics industry is one of the main beneficiaries of the new GST system. Still it won’t happen in a short term period, there could be chances of some errors, mismatches and other compliances in the initial stage. But in the long run operational efficiency bound to improve with the above discussed factors.