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Current challenges and Impact of GST on Logistics Sector

OCTOBER 09, 2015

By Bhavnoor Bhatia,CA

THE Indian logistics turnover crossed USS 100 billion revenue in 2014, a growth of about 5 percent YoY. Transportation accounts for about 60 per cent of the market revenues. The Indian logistics market is likely to grow at 6-7 per cent every year during 2014-2020 and reach revenue of about USD 150-USD160 billion by 2020, according to Frost & Sullivan.

Clearly, Indian logistics sector is one sector which is of immense significance to India's growth story ('Make in India') courtesy its underlying attribute of being a connector to various other sectors. Warehousing and distribution channels are crucial ingredients to developing a cost effective model. Currently, the decision to stock/ release inventory and goods distribution model relies significantly on levy of Value Added Tax/ Central Sales Tax (VAT/CST) and applicable local taxes. Tax optimization is given an edge over operational and logistics efficiency.

Goods and Services Tax (GST) is proposed to be implemented with a view to introduce a tax structure across nation which addresses the purpose of one unified market. Given the intention of GST, logistics sector is sure to see good days and find resolution to lot of practical and tax issues. Consequently, it is no surprise that they are desperately awaiting its roll out.

Further, Foreign direct investment (FDI) in logistics sector is on hold due to delay in GST roll out. In my view, be prepared to witness huge investment in logistics sector as we inch closer to GST roll out. May be it's a stock tip!

Current Challenges

The existing tax structure loads multiple taxes by way of central and state levy in the form of Excise Duty, Customs Duty and then topping it up with VAT/CST. If this was not enough, there are other levies like Octroi, Local Body tax, state level cess etc.

The manufacturer/supplier is paying taxes on taxes. Industry resorts to tax planning by structuringa model which involves stock transfer between warehouses. Therefore, most manufacturing industries and third party logistics players have warehouses/offices in each state to reduce tax burden of CST – as CST is non-creditable tax.  Thus, structuring of operations is more driven by intent of saving taxes, rather than achieving operational efficiency.

Also, long delays at check points involving rigorous checking of numerous documents and applicable tax payments worsen the situation. This results in highly inconsistent and capricious delivery results. Logistics cost in India is higher by 60-70% as compared to global benchmarks according to World Bank.

With such cost structures, and net margins less than 5% on turnover of few millions, technology adoption is a massive challenge for small and medium business enterprises in this sector. The ultimate net result of high cost, tech inefficiency etc is, unfortunately, borne by the end consumer.

While the proposed GST law plans to amend the inefficiencies in the existing structure, it also vows to reduce cost of logistics in India.

GST Impact

One thing that is certain with GST roll out is re-structuring of businesses in this sector and this time, it will be based more on operational efficiency than tax workings. Let's understand why:

•  Proposed GST law intends to tax stock transfer and also provide full credit of inter-state supplies as against existing law wherein CST is a non-creditable tax. This would result in some serious cost reduction.

•  From the warehousing perspective, this would lead to lesser number of warehouses – either through consolidation or shutting down some and opening new ones on the basis of location of audience intended to tap.

•  While checkpoints may not be done away initially with but lesser documentation and subsuming of entry tax/ octroi etc. will result in faster movement across border. This would have a substantial impact on reducing transit time and will contribute to further reduction in cost.

•  Considering petroleum is a major input for logistics sector, another significant impact under GST regime would flow if petroleum products are included and taxed under GST from the inception as it would make logistics companies avail credit of such inputs.

It would not be far-fetched to say that post-GST regime is likely to bring quite a few unseen opportunities for unorganized entities to join hands with organized sector. It would enable unorganized to play at par with organized sector and eventually result in betterment of industry at large.

With GST roll out in realistic sight, one can expect interesting times for logistics industry and make it competitive at global standards.

Also See : TIOL TUBE Videos on GST

Episode 1 on GST

Episode 2 on GST

Episode 3 on GST

 

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

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