Impacts & Opinions

Impact of GST on Logistic and Warehousing Sectors

Transportation & logistics Includes:-

  • Transportation & logistics is a much wider term. It covers various service providers and services provided by all modes of transportation (e.g., air, road, rail and sea).
  • It also comprises related services such as warehousing, handling and value added services such as packaging, labeling, assembling etc.
  • Transport service is used both as intermediate input and in final consumption. Also the transport equipments are subject to multiple taxation at both central and state levels.
  • 60% of logistics in India moves by road and time spent at interstate check posts due to difference in taxes between states accounts to idle time (60% of total journey time) which will get eliminated in GST regime. Hence, transport time would reduce by 30-40% and transport costs by 20-30% leading to fall in prices by 3-4%.
  • Petroleum products are kept outside the scope of GST currently, and since nearly 50% of all goods transported is motor spirit, some of the benefits of GST may not reach end customer. Also, the reverse charge mechanism applicable to GTA (Goods Transport Agencies) would continue under GST.

Warehousing :

  • Warehousing decisions will henceforth be driven by considerations like location of major customer / market and optimization of goods movement. Since any supply would be taxed, branch transfers would get discouraged leading to optimization of transport. Elimination of statutory forms (C-Form, F-Form, E1-E2 etc.) would reduce the requirement for scrutiny at state borders.
  • Geographically central locations will benefit more, e.g. Nagpur, the centre of the country, is already benefiting from a change that will allow companies to move goods across state borders without being hamstrung by local levies.
  • The consumer durables sector is expected to witness maximum drop in the logistics costs as percentage of total sales, as their warehouses are built at different states to avoid interstate tax. Mostly, the consumer-oriented industries are going to have high impact of GST on its operations model rather than capital intensive industries.
  • The existing interstate taxation system has forced the companies to create and maintain warehouses in each state. Currently, there are around 20-30 warehouses per company, one in every state, in addition to this 20-30 Carry & Forwarding agents per state making the supply chain longer and inefficient, GST tax will be levied on transportation of goods and full credit will be available on interstate transactions. Logistic costs are expected to be decreased by 1.5- 2.00% of sales on account of optimization of warehouses leading to lower inventory costs which are set up across states to avoid paying 2% corporate sales tax and phasing out of interstate sales tax. There is immense scope for optimization of costs.

GST – BEFORE AND AFTER:

  • Let us consider the example of a manufacturing company in Chennai, which moves its goods to New Delhi. The actual sale happens in New Delhi and the finished goods have to be transported from Chennai to New Delhi across different states.
  • As per the current taxation norms, one has to pay Central Sales Tax (CST) when moving a good to another state and selling it in the other state. However, if the good is moved for stocking and not for sale, then CST need not be paid. So many companies in order to avoid paying CST, they show this movement as moving to stock and not moving to sell.
  • To do this, companies have warehouses in every state where the finish goods are stored and then the goods are transported for sale from the warehouse in each state.
  • With the implementation of GST, the companies will be free to setup their own warehouses to optimize cost and improve customer service.

IMPACT ON SUPPLY CHAIN

  • The structure of the supply chain in influenced by differential taxes based on geographical location. By eliminating multiple state taxes, the logistics companies are encouraged consolidate their warehouses instead of maintaining one in each state to avoid central tax.
  • This in effect brings the overall cost of the product down as the inventory cost and inventory carrying cost down. This directly affects the final cost of the product bring the selling price down.
  • The cost saved by the companies as a result of GST can be used to invest further to improve serviceability.
  • After GST implementation, the design of the supply chain will be based on customer service and logistics cost. It also offers flexibility into demand and supply matching.
  • GST would also enable firms to increase the accuracy of the forecast. Smaller warehouses can also be merged into one bigger warehouse and space optimization will be achieved.

IMPACT ON WAREHOUSING

  • With the implementation of GST, logistics companies can have restructure their warehouse locations and can have one central warehouse or can go for warehouses at specific locations or can adopt a hub and spoke model.
  • With GST the local state taxes are eliminated and there will be only one Goods and Services Tax across the entire country.
  • This enables the companies to achieve cost efficiency in their operations and thereby transferring this cost benefit to the end consumer in the supply chain.
  • Advantages on warehousing with respect to GST is that companies can consolidate stock at their warehouses. Demand variation at a particular warehouse can also be reduced. This in turn improves demand planning and improved inventory management.
  • Disadvantages of GST with respect to warehousing is that companies face challenges during route planning while having to deal with deliveries across a bigger geography.
  • With larger warehouses (in terms of capacity), the transportation lot sizes automatically increase, which results in the larger and more efficient trucks. The optimization and rationalization of these options provide the competitive advantage to the business.

IMPACT OF EXCLUSION FROM GST

  • With the introduction of GST, states have to forgo their authority on state levied taxes and has an impact on the states’ revenue. Hence, the reason why some of the goods such as Petroleum products, alcohol for human consumption and tobacco has been kept out of the purview of GST.
  • Keeping the petroleum products out of the GST would have serious implications on transportations sector and would not help achieve the actual goal of GST.
  • The motor spirit consists of the larger part (close to 60%) of the transportation business. Hence, exclusion of petroleum products from GST would add up to the additional costs and breaks the chain of credits of GST.
  • However, instead of excluding the petroleum products, they can included with higher tax rate and there can be a sharing basis between center and states. This would allow level playing field to transportation providers.