Over the last few months, one of the most pressing topics being debated in both the Houses of the Parliament is none other than the impending Goods and Services Tax (GST) Bill. Hailed as a game changer by many and a baby step of little significance by some, the policy change and the 122nd Constitutional Amendment that was made to make it legal and implementable, will undoubtedly have long-lasting effects on Indian industry as a whole.
Before we discuss how GST will impact the logistics space specifically, it is important to understand what GST fundamentally is.-
Suppose a toy manufacturer buys raw materials worth Rs 100 which includes a tax component of Rs.10. He adds a value of Rs 50 to the toy after making it, thus establishing its new value at Rs 150. At a tax rate of 10%, the tax on this toy should be Rs 15. Thus the total price comes out to be Rs 150+15=Rs 165. But now under GST, the manufacturer can set off this tax of Rs 15 against the tax he has already paid on raw materials Rs 10 to realize the effective GST incidence on the manufacturer at only Rs 15-10=Rs 5. This cycle will further continue at the wholesale, retail and finally the consumer-end of the product cycle.
Currently, the Indian tax structure has Value-Added Tax (VAT) systems both at the central and state levels. After GST comes into effect, all central and state-level taxes and levies on goods and services will be incorporated within an integrated tax consisting of two parts: a central GST and a state GST. Under it, tax will be charged only on value addition at each stage, with the manufacturer/wholesaler/retailer able to set off his/her taxes against the central/state GST paid on his purchases at every stage. The end-consumer will have to bear only the GST charged by the last stakeholder in the supply chain, enjoying all the set-off benefits at the previous stages, thus creating a pyramid-like, progressively decreasing tax mechanism.
With a precursory introduction to GST, it is now time for us to see how GST will impact the logistics industry:-
Impact on logistics-A case study
Manufacturing in Kolkata-Sale in New Delhi
Suppose a company makes products in Kolkata and plans to sell them in New Delhi. As per current taxation norms, CST or Central Sales Tax would have to be paid when passing from one state to another. If however, the good is moved for stocking and not for sale, then CST need not be paid.
So many companies, to avoid this CST, establish warehouses in every state where the finished goods are kept till they are transported for sale in the respective state.
This system has created the following problems thus far:
- Increased the warehouse establishment cost of companies
- Created the need for too much of paperwork
- Resulted in unnecessary stops that were determined not by geographical parameters but by taxation issues. For instance, let us consider another example of a city X in Haryana which is approximately 30km from Uttar Pradesh. Shipping the goods from Uttar Pradesh warehouse to X requires the company to pay CST as X is in Haryana. So, the company ships goods from the warehouse in Haryana, which might be more than a 100 km away from X, just to avoid CST.
Post GST, companies will be free to establish their warehouses based on providing optimum customer service and efficiency. This will create a demand for larger trucks which can cover longer distances, reduce the number of trucks on road and the number of routes on which trucks ply will also decrease.
Impact on supply chain management
By eliminating multiple state taxes, companies will feel encouraged to establish larger warehouses at locations which are geographically at a strategic advantage. This will lead to a consolidation of warehouses, and companies might come together to establish large units which will be owned and maintained in co-operation. This will in effect bring the inventory cost down and will result in a decrease in price of the final product.
Impact on transportation
With lesser number of warehouses, the location of each warehouse and the allied transportation network would eventually turn out to be critical. Apart from demanding a solid infrastructural push from the government creating better roads, highways etc. which can handle the wear and tear from trucks covering long distances, it would also need a futuristic and accommodative planning on part of the transporters to provide more trucks on the popular routes, such as the Golden Quadrilateral. Furthermore, with routes becoming predictable, security and safety of truck drivers will increase and this will lead to better working conditions for the driver. It might however have an impact on the supply of drivers for fringe routes as most drivers would be reluctant to commute on routes that do not have much employability.
Larger and more efficient trucks would be the need of the hour as long-distance transportation will become a norm. Transporters who can equip their fleet with these vehicles enriched with state-of-the-art infrastructure such as temperature and pressure control will definitely endear themselves more to the clients.
Re-organized manufacturing units and warehouses would, on one hand, reduce the primary freight charges as they will be located in proximity to each other geographically. Secondary freight charges, i.e. from warehouse to selling points may increase because of fewer warehouses, thus demanding longer distances of travel.
Consolidation of industry
GST will undoubtedly have a trimming effect on the logistics industry as only those players who are equipped to handle longer journeys will be in demand. This will lead to major consolidation with only organized and efficient players being left. Furthermore, companies will now easily outsource their logistics operations to 3PL and 4PL service providers so that they can focus on the core areas of business such as product development.
Technological inclusion will play a big part in the logistics industry post GST. Vehicle tracking, condition of the deliverables, number of stops made, destination location etc., all of this information will need to be provided to the client in the most transparent and seamless manner. GPS enablement of vehicles will emerge as a major requisite for clients before hiring transport companies as the direct routes post GST will lead to a greater competition among providers of goods and services and thus there will not be much scope for time delays. Furthermore, latest technology such as Warehouse Management Systems (WMS) and robotics can also feature in big warehouses to ensure efficient management.
Every major change is fraught with apprehensions and assumptions. The GST is undoubtedly a big step in the taxation history of independent India, and it will have an impact on every individual’s life. One things is for certain, however, that with the introduction of GST, the Indian logistics industry is set for a major revamp, and it will only emerge fitter, organized and much more efficient post its implementation.
[By Raghav Himatsingka, CEO & Founder of Truckola]