GST Will Provide Long-term Fillip To The Logistics Industry – Article written by Harpreet Singh Malhotra
A one-nation, one-market system that boosts the ease of doing business, GST will encourage organised players in various verticals, including logistics and warehousing.
After a decade of false dawns, the Goods and Services Tax (GST) finally cleared a major hurdle when the GST Constitution Amendment Bill was passed by the Rajya Sabha on 03 August. Myriad benefits apart, implementation of GST will go a long way in addressing the bottlenecks faced by the logistics sector for decades. India’s globally infamous traffic jams, toll taxes and octroi bottlenecks are one of the prime reasons why transport costs hovered high for decades.
In driving the economic growth of a nation, road infrastructure and other modes of transport are extremely crucial. The NDA Government has clearly understood the importance of improving infrastructure to aid the quick movement of goods across India. This is reflected in the fact that the country’s logistics performance at key international gateways has improved markedly during the past two years, going by the World Bank Logistics Performance Index rankings. From 54 in 2014, the country’s ranking has risen swiftly to 35 in 2016 in the World Bank’s biennial report on international supply chain efficiency.
With GST on its way towards final implementation in India, perhaps as early as 01 April 2017, it has the potential to revolutionize the logistics industry. India’s trucking and logistics sector will truly come into its own when GST is implemented at the ground level. Analysts estimate that the logistics sector would witness savings of up to $200 billion annually with GST, thanks to faster movement of goods and minimal idling, which have been the industry’s bane.
Besides, many tax procedures will be reduced dramatically and cost of holding inventory will fall by 50 per cent since stocks would no longer need to be piled up in various warehouses. Indeed, companies will be in a position to hold inventory in just one large central warehouse, rather than stocking goods in various smaller warehouses, as standard tax rates will preclude the need for multiple warehouses across states, which was partly driven by the need to follow tax codes in all states. Accordingly, an FMCG behemoth may build large mother warehouses at pivotal points across the country. Multiple logistics companies could then be hired to handle distribution and supply chains, leaving the company free to focus on core activities.
Thanks to an efficient ecosystem emerging via GST, overall costs will fall, benefitting all stakeholders, including end customers. Till date, India’s logistics and freight sector has remained largely disorganised. Standard taxation will boost bottom lines and inject efficiency into the trade that had till now attracted only unorganised players.
Prolonged delays at toll booths and extra fuel usage due to regular idling were resulting in annual losses of more than Rs100,000 crore. Such delays don’t just burn money, they slow down business too. For example, while trucks in the US are said to drive 800 km per day, the distance in India is only 280 km. This is no surprise because where average US truck speeds exceed 89 km per hour on highways, 12.7 kmph is considered good as a long-distance average in India.
Driving Economies of Scale
Once GST gets going, these challenges will become a thing of the past. GST would subsume all Central taxes and various local levies, eliminate time-wasting checkpoints and make diverse verticals across India more efficient through faster deliveries of goods and services. In essence, from a nation of multiple markets, India would be transformed into one common market backed by borderless, barrier-less systems permitting free movement of goods and services.
As with warehouses, companies and logistics firms will be in a position to use fewer but bigger trucks to transport their consignments – further reducing pollution and curbing traffic congestion. Many companies may even outsource logistics operations as lower costs make this viable. Moreover, they could adopt the hub-and-spoke model. These measures will drive higher economies of scale, making businesses more remunerative through savings of up to 50%.
In the long term, GST will drive further economic growth by giving a fillip to manufacturing activities. The Government-driven ‘Make in India’ programme will also gain substantially since India’s most far-reaching indirect tax reform will benefit various forms of production. As multiple tax rates in different states create immense distortions in the allocation of resources, a single common market would completely transform the market dynamics and drive greater tax compliance. Being a multi-stage tax, GST provides an input tax-credit mechanism. Therefore, each link in this value chain, dealers and distributors included, will need evidence of compliance by the previous link to claim the necessary tax set-offs. This will broaden the tax net by encouraging greater compliance.
Ultimately, a tax regimen incentivizing compliance will improve the ease of doing business and open up new investment avenues. Foreign and domestic investors will be comfortable taking a long-term perspective vis-à-vis operations in India. The country would then have truly passed the GST test.
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