Impact of GST on Logistics Sector
Foreseeing the intention of the government to boost the infrastructure within the country, and implementing GST within this fiscal, the Indian logistics and transportation industry is looking forward to a giant leap in efficiency, growth and sophistication. During our deliberations with our clients, we have experienced that most of them get anxious about GST. “When will GST actually be implemented?” “Can we plan something in advance to leverage the impact of GST?” are a few concerns they share.
Amidst the signs of global economic turbulence, the government is in constant pressure to reduce the cost of doing business in India and furthermore, living up its “manufacturing hub” dream.Therefore, the taxation reforms proposed in form of GST are much needed now than ever before. The present dual taxation structure of state and central government is quite complicated and brings inefficiencies in the system. It also adds to the cost of goods as the tax paid earlier in the value chain gets re-taxed, and companies end up paying tax on the tax paid.
Impact on taxation
GST will have a significant impact on the way logistics companies are currently taxed in India. GST would provide the benefit of providing credit for service tax paid by manufacturers. Both CENVAT & VAT provide tax credit to the manufacturer for the tax paid for raw materials, hence a tax is charged only on the value added by the manufacturer. Usually, various services including logistics are involved in getting the input material to its final customers. Service tax is paid on the cost of such services. However with GST, cost of any services, including logistics, will be considered a value addition, and the manufacturer will get tax credit for the tax paid.
Transformation of warehousing strategy
Currently, most of the companies operate with multiple warehouse strategy, having different warehouses in different states, to avoid interstate taxes. With GST in place, India will become a common market without any difference between interstate or intrastate sales. It will allow companies to operate a large central warehouse rather than operating multiple warehouses. Hence, the companies will be forced to re-engineer their business operations to leverage efficiencies of scale, locations, warehouses and routes. The networks associated with warehousing and transportation hubs will the impacted the most in the supply chain. The location of warehouses will change to ensure proximity to manufacturing hubs or consumption markets. This would allow companies to expand their existing warehouses, develop new warehouses or indeed shut down several existing setups.
Some of the most affected regions will include Mumbai-Gujarat-Rajasthan-NCR corridor in the northwest, Chennai-Bangalore stretch in the south and Nagpur region in the central part, particularly due to upcoming manufacturing setups and the planned Delhi-Mumbai Industrial corridor (DMIC) in this region.
As GST provides an opportunity to revisit our Supply Chain strategy, those who move early are likely to gain an advantage over their competitors. Efficient handling of larger volumes per warehouse would demand increased reliance on technology applications. At Applane, we have helped number of logistics companies to optimize their processes and extract the most out of their business.