GST In Logistics: A Game Changer

10 April 2017

With the introduction of Goods and Services Tax (GST), it will be a game-changer for the logistics industry. Currently, all states within the country tax goods that are transported across borders at different rates. The state authorities examine the goods and levy appropriate duty on the freight causing delay in deliveries. As a result of this, a lot of transportation is lost in the transit.

GST will be a single tax on manufacture, sale, and consumption of goods and services throughout India. The purpose behind this move is to have one indirect tax for India which will make the country a unified common market. 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.

As higher than optimal time is consumed per transportation, logistics costs incurred in India 2 to 3 times compared to the global benchmarks, according to the World Bank.

In simple terms, the logistics cost in India is about 13 per cent of GDP as compared to about eight per cent in western countries and about 18 per cent in China.

But with the introduction of GST, India will become a seamless market without any difference between inter-state or intra-state sales. This will essentially disrupt the existing ineptitude and facilitate structural re-engineering of the logistics network. Service providers would be incentivised to leverage hub-and-spoke supply chain networks by operating large central warehouses and remodelling transportation routes.

On the taxation front, at national level, it will result in more competent and efficient cross-state transportation, lesser paperwork for transporters, thereby reducing the logistics costs. Not just costs, it will also save a lot of transportation time. As transporters are resorting to digital space to book trucks, the scope of online truck booking in India is broad. The revolution in the industry has been brought by truck aggregators who are providing reliable online truck booking services to transporters. However, the GST will be a comprehensive nationwide single tax which will subsume the plethora of taxes in the country.

Industry analysts anticipate that the largest warehouses will come up in the seven largest consumption centers of the country catering to more than 50 per cent of the country’s needs. The rest of the country will be served from these large warehouses via secondary dispatch. Finally, the requirements for long distance trucks will increase due to consolidation of warehouses and long distance secondary dispatches.

The quantum of investment from the private sector, government regulations, the investment in infrastructure by the government year-on-year are all those factors that determine whether the logistics sector will grow or be inhibited. The logistics sector in India has been performing well in the last few years growing at a rate of 15 per cent annum. However, it is the implementation of GST which will give the sector a much needed impetus in India.

This reduction of 6 per cent in taxes will count a lot for the final burden bearing consumers. Moreover, GST will lead to a total reduction of 20 per cent in other logistics cost like warehousing, freight forwarding etc.

But before that, the major challenge before the government is to arrive at a revenue neutral rate to ascertain no adverse effects on the revenues of central and state governments after the implementation of GST. Furthermore, the government has to protect the interests of all the stakeholders including the ultimate consumers.

By some estimates logistics costs in India is 2-3 times global benchmark, on account of several factors, including delays at state border check points.

Moreover, the World Bank in its “India Development Update” (Report No. AUS10373) of October, 2014 has estimated that GST will free up decisions on warehousing and distribution from tax considerations so that operational and logistics efficiency determines the location and movement of goods. The World Bank report further notes that “Freight and logistics networks will realign according to the location of production and consumption activities, creating the hub-and-spoke models that are needed to improve freight and logistics performance.”

However, the benefits of GST is not specifically related to booking trucks online but how a gradual inclination towards employing technology can help the Indian logistics industry immensely. Currently the Indian transportation sector is highly fragmented – largely because of the dependency on manual workforce for every activity in the transportation value chain – leading to inefficient utilisation of assets and therefore higher costs. “The new-age tech-driven companies enable automation of every process that reduces the dependencies on manual labor and the errors that come from them. This will eventually help transportation operations scale up and bring about convenience as well as cost efficiency to the transportation sector,” adds Raghav.

In his view two factors will determine how fast the logistics cost starts declining in India: The speed with which the Indian industry adapts to the new rules of distribution networks post-GST and penetration of technology in the transportation sector which will create cost efficiency and reduce overall costs.

SOURCE: BUSINESS WORLD