India is all set to usher in a game-changing tax reform—the goods and services tax (GST). Apart from creating a unified market across India, GST will help make India’s manufacturing competitive by cutting high logistics and warehousing costs.
Logistics industry is projected to grow at a compounded annual growth rate of 15-20 per cent between 2015-16 and 2019-20 that will get a further boost if GST is rolled out from this year, which can trim costs by 20 per cent Cost can also come down drastically as a one-nation-one- tax GST structure can massively reduce the long and winding queues at border checkpoints and other entry points within and between the States. Another reason for lower logistics cost is that operators will be able to rationalize and restructure their warehouses and other logistical infrastructure. Due to trade barriers such as the entry tax, local body tax, Octroi and other hurdles, trucks idle for 30-40 per cent of the day, leading to huge man-hour and fuel losses.
Since GST will be levied on goods transportation and full credit will be available on interstate transactions, logistic cost is expected to come down by 1.5-2 per cent of sales due to warehouse optimization and the resultant lower inventory cost.
The logistic sector is primarily divided into four segments — transportation, warehousing, freight forwarding and value-added logistics.
The transportation contributes the lion’s chunk of 60 per cent of the logistic pie, followed by warehousing compromising industrial and agricultural storage at 24.5 per cent. Packaging and other related businesses constitutes the rest of the segment.
The present taxation rate peaks at 26.5 per cent (Cenvat of 14 per cent, and VAT of 12.5 per cent) apart from the state level corporate tax of 2 per cent for transferring inter-state goods.
The proposed dual GST model (Central GST and State GST) proposes to replace around 29 State and federal taxes and tariffs for a single tax at the point of sale. The current combined Centre and State statutory rates for most goods works out to be 26.5 per cent but GST is expected to bring it down to 18-21 per cent.
The existing interstate taxation system has forced companies to create and maintain warehouses in each State and at present each company has 20-30 warehouses, in addition to this 20-30 carry & forwarding agents in each State making the supply chain longer and inefficient.
Further, the firms in the unorganized sectors, too, would be expected to improve their service levels if they intend to successfully grow in the likely shape up or shape-out competitive landscape. The post-GST regime is, in fact, likely to offer many more unseen opportunities for unorganized entities to tie up or collaborate with established companies. This could ultimately result in a win-win scenario for both the collaborating parties and the industry at large.
GST, combined with the dismantling of inter-state check posts, is the most crucial reform since the economic liberalization in 1991 that can significantly improve domestic and global competitiveness of Indian manufacturing firms.