Impact of GST on the Logistics Industry
The Government of India rolled-out the much-anticipated Goods and Services Tax (GST) on the first of July, 2017. The “One Nation – One Tax” philosophy was conceived to streamline and ease the tax credit system. With a focus on eliminating the chaotic discrepancies in the taxation structure caused by the application of miscellaneous value-added taxes (VAT), GST seeks to introduce a common levy with the purpose of simplifying tax administration in the country. The implementation of GST is expected to benefit the logistics, fast-moving consumer goods (FMCG) and cement sectors.
Impact on the Logistics Sector
The World Bank reports trucks in India cover 250-300 km per day against the average 800 km and 450 km in the USA and Brazil respectively. Approximately 60% of travel time is lost due to unorganized paperwork and tax compliance procedures at interstate checkpoints, forcing logistics costs to hover at two to three times more than the international benchmark. India’s logistics costs stand at almost 14% of the total value of the shipment, as opposed to the international benchmark of 6-8%. In the pre-GST era, goods were subjected to a statutory taxation rate of about 26.5%. The new tax system levies 18% GST on goods. This change is expected to reduce logistics costs in the country.
The introduction of GST has eliminated the time wasted at state borders by disposing lengthy clearance processes. A reduction in this road travel time by half can cut logistics costs by 30-40%, a World Bank report suggests. As an example, about 30% of the travel time between Chennai- Kolkata is spent on border checkpoints pre-GST, per sources. Furthermore, the subsequent incorporation of the E-Way Bill requiring an online registration for goods worth more than INR 50,000 is expected to ease freight movement across borders.
Earlier manufacturers would typically have warehouses in different states across the country to avoid central sales tax and prolonged on-road transit time. Furthermore, corruption at state borders and the influence of local booking agents would force the logistics sector toward fragmented behavior. The introduction of an integrated GST and the prospect of easier delivery of goods has encouraged companies to consolidate their warehouses in select strategic locations with the intention of centralizing their dispatch operations and capitalizing on the renewed commercial road transport opportunities.
The Transport Ministry is working toward the construction of logistics parks across India with the purpose of aggregating freight to build distribution hubs. The emergence of these hubs will bolster long-haul on-road movement of freight on larger trucks. The transport sector expects this transition to a hub-and-spoke model to reduce logistics costs by 20%.
The establishment of consolidated warehouses in strategic locations is a highly-preferred option in the GST era. Selection of “zero mile” locales for warehousing can help manufacturers reduce road transit costs and delivery time, which in turn improves the efficiency of the supply chain. The subsequent adoption of the hub-and-spoke logistics model would enhance the role of established 3PLs, while cutting down the dependency on smaller transportation companies that thrive on last-mile delivery consignments. Furthermore, approval for 100% FDI in the warehousing domain would encourage a fresh wave of foreign involvement in partnerships, with national players bringing in more efficient and technologically advanced solutions.