GST- a way forward for logistic industry

[sandeep saini]

Dear professional colleague,

GST- a way forward for logistic industry

India’s globally infamous unending queue, uneasy checkmates at our border check posts, filing of waybills/entry permits, compliances under entry tax laws and local levies, are one of the prime reasons why transport costs hovered high for decades. But once the GST implemented , these challenges will become a thing of past, as GST will subsume most of Central taxes and State levies, eliminating the time wasting checkpoints and make diverse verticals across India more efficient through faster deliveries of goods and services. In other words, India a nation of multiple market today will transform into one common market backed by borderless, barrier-less systems permitting free movement of goods and services and therefore GST will facilitate “Make in India by making one India”.

As per the estimates by the experts, logistic sector would witness savings upto $200 billion annually with GST implementation, due to faster movement of goods and minimal idling. Logistic players have started dreaming about a borderless, barrier-less tomorrow when the goods will move on seamlessly.

Presently, the logistical costs within India is high and the same is supported by ample evidences. According to one study, for example, in one day, trucks in India drive just 280 kms as against 800kms in US, due to which costs increases viz. wages of drivers, extra fuel usage due to regular idling, firms are forced to maintain larger inventory and it also limit the location choices, for example, firms has to choose the location closer to suppliers/customers instead of lower-cost location in terms of wages, rent etc.

Further, it is observed that just about 40 per cent of the total travel time is spent in driving, on the other hand,  check points and other official stoppages take up almost one-quarter of total travel time and it is estimated that eliminating check point delays could keep trucks moving almost 6 hours more per day, which will results in additional movement of 164 kms per day.

Due to above bottlenecks, logistics costs are higher than the wage bill or the cost of power and 3-4 times the international benchmark. The removal of bottlenecks becomes more important for India, as the share of  roads in freight traffic is about 72 per cent, which is much higher in comparision to other countries and rising over time because of under investment in railways, therefore inter-state trade costs to be reduced significantly, due to excessive reliance on roads for movement of goods.

According to world bank estimate about 20-30 per cent of inter-state trade cost is due to taxes. So, after imlementation of GST, these costs are expected to come down, which will boost inter-state trade and hence productivity growth within India.

The Impact of GST on Logistic Industry

1. The GST will enables the businesses viz. e-commerce to rejig their supply chain, since under GST supply chain desigh will be based on demand management and logistical benefits rather than tax costs.
2. The tax procedures will be reduced significantly under GST and the companies would prefer to hold inventory in just one large central warehouse, rather than stocking goods in various smaller warehouses, as the standard rate of taxes would be more or less uniform across India, which will preclude the need for multiple warehouses across states. So, instead of transporters, they will prefer third-party logistics companies that will not only transport but also distribute goods as well as collect money from customers.
3. The companies would enter into long term contracts with logistic companies, lets say for three or four years as against one year unlike today, and theses long term contracts would also give confidence to the logistic companies to purchase new vehicles as per the specification of customer and banks will also ready to extend loan. So, experts feel the contractual business could increase upto 50 per cent, after implementation of GST.
4. The companies and logistic firms will be in a position to use fewer but bigger trucks to transport their consignments, further reducing pollution and curbing traffic congestion.And many companies would prefer to outsource logistic operations, as lower costs make this viable.  

Steps that logistic service providers need to undertake

1. Develop a stong team to manage sophisticated technology enabled fufilment centre.
2. Indentify focus Industries that need to revisit their supply chain and their immediate needs post GST implementation.
3. Enhance technology capabilities and processes to adhere to new input tax credit system.
4. Reconfigure current fleet size and type, to align to emerging needs.

Issues need to be addressed under GST

1. Entry tax is subsumed under GST via deleting the Entry 52 from State list given in Article 246 of constitution of India, but Article 243X/243H are not amended, because of which panchayats and municipalities can still levy octroi e.g Municipality like BMC will continue with collecting octroi.
2. Logistic sector should be incentivise, by providing lower GST rates for capital equipment, inputs and input services for setting up warehouses and other infrastructure should be provided.
3. The ancillary services used for the export of goods should also be provided the same treatment as international freight, i.e. zero rating, which will be in accordance with the international practices adopted in Canada, Singhapore, UK and EU.
4. Presently, inbound international freight is taxable whereas outbound international freight is zero rated, under GST both inbound as well as outbound freight should be zero rated, so as to enable the service providers to avail the benefit of credit on inputs and input services.

With the implementation of GST, it would be better if the government also give focus on other problems of logistic industry viz. Infrastructure of railways, road, ports etc., so that a virtual campaign named “Move in India” would be implemented besides “Make in India”.