IMPACT OF GST ON LOGISTICS

Introduction to GST:-

CGST Act 2017: GST (Goods and Services Tax) or CGST (Central Goods and Services Tax) was introduced as The Constitution (One Hundred and Twenty Second Amendment) Act 2017, following the passage of Constitution 122nd Amendment Bill. CGST bill was introduced in Lok sabha on 23rd March 2017. Later on 12th April 2017 Dr.Pranab Mukherjee the then President of India gave the consent to the bill. GST is an indirect tax throughout India to replace taxes levied by State and Central government of India on goods and services. It is a uniform indirect tax removing all the other taxes levied at different stages bringing uniformity in the tax system.

Salient features of GST:

1. Applicable to both intra-state and inter-state transactions
2. Applicable at the time of supply
3. Administration at state and central level
4. Follows a two-rate structure
5. Levied on import of goods and services in India

Background of logistics

Logistics can be defined as the planning, execution and control of the procurement, movement, stationing of personnel, material and other resources to achieve the objectives of a campaign, plan, project, or strategy. It may also be stated as the “management of inventory in motion and at rest.”

Logistics is considered as the backbone of the manufacturing and trading activities in the Indian economy.  It plays a crucial role in developing countries where consumption is reaching a peak and demands are ever-increasing. A well developed and organized logistics industry will leapfrog the “Make in India” initiative taken by the Modi Government to it’s required position.

Simplifying it, logistics can be considered as the transport of goods from it’s point of origin to its point of consumption i.e. to the end user. A well planned and well organized logistics will ensure delivery of right items at the right time to the right destination in a proper condition to the right consumer. Everything goes for a toss if any of this is not met properly. The stakes remain high for both consumer and supplier.

The overview of the logistics in the present scenario:-

Indian logistics is expected to grow at a CAGR of 8.6 percent between the year 2015 and 2020, which grew at a rate of 9.7 percent during 2010-2015.

Transportation and communication accounted for 7.0 percent of the nation’s Gross Domestic Product (GDP) in the year 2015, accounting for around US $130.44 billion.

Drawbacks of the present logistic industry :-

The present logistic industry is fragmented and under- developed. Due to this, the logistic costs are relatively and adding on to the causes are :-

• Poor physical and communication infrastructure
• High dwell time at ports
• Under developed containerization
• Multi-layered tax system- this contributes to the significant delays at border crossing points.

On the whole, the Indian logistic industry is not as efficient as it is expected to be which causes delay in the transportation of goods and services.

What impact will implementation of GST have on logistics?

GST is India’s most significant tax reform and is labeled as a game-changer for the Indian economy. The implementation of GST will have wide repercussions on every sector especially on the logistics Industry.

Discussing the general impact of GST:-

• Increase in the tax base:-

GST being a multi-stage tax, it provides for an input tax credit mechanism, and since every link in the value chain, right form dealers to distributors, will need a proof of compliance by it’s preceding link to claim the required set-offs, it is expected to broaden the tax base by increasing voluntary compliance.

• GST will enhance direct tax mechanism:-

GST implementation will result in scaling-up direct tax collections because:-

1. GST payments by the tax-payers will be linked to their Permanent Account Number (PAN)
2. Improved tax buoyancy: the GST Database will be looked after by the National Securities Depository Limited (NSDL), which also maintains the Tax Information System (TIN). This integration of GST with the Income Tax Department will aid the authorities to triangulate the information.

• Benefits to the Indian Economy:-

1. A formation of better environment to perform businesses in India overtime would be developed and this will eventually provide a platform for a better economic growth helping India to transform into a developed nation.
2. Implementation of GST will give the control to the Indian Government to exercise tax duties bringing down the expenses within the system; will also deduct unaccounted part of the economy thereby increasing the Government resources.
3. This will enhance the competitive spirit in the Indian economy to match with the levels of developed nation’s economy within the global economic system.
4. This will also increase the funds and hence can be used for the development of the nation.

• Inflation in the initial stages:-

Any change will have certain repercussions which will create a problem in the beginning. However, these changes are transitory. Implementation of GST will scale-up the inflation in the initial stages thereby creating an issue for the consumers.

After discussing the general impacts of GST, let’s talk about the impact of this tax reform on the Indian Logistics Company:

The implementation of GST will bring the following key structural changes by redesigning the supply chains of the company thereby reducing the cost of the logistics:-

• The consolidation of warehouses will result in fewer but larger warehouses and hence making India on big market.
• The number of vehicles will be reduced on the road by introducing larger trucks. The new reform tax will result in greater adoption of a “hub-and-spoke” model in different segments such as warehousing, cold chain, container freight stations and also inland container depots.
• GST will also lead to surplus amount of savings, reduction in wastage and lower delays and thereby bringing in-scale to logistic company.
• All this will lead to an increase in the number of companies outsourcing their logistics operations and will also lead to up-scale of economies for the transport.

Advantages of GST on Logistics:-

1. Cost and time saving because of warehouse consolidation:–

Consolidation of warehouses will result in fewer but bigger warehouses and will put an end to market driven logistics which will eventually result in meaningful cost savings. Abolishment of the time consuming paper work and entry tax will result in easier tax compliance procedures making the movements of goods easier and hence saving a lot of time.

2. Forward Integration:-

Many business companies for whom transportation is not a core part of their venture, will increasingly outsource their logistic operations to the third party and the fourth party logistics service providers. They will offer services at lower costs as they will gather scale.

3. Uniformity in the tax system:–

The uniformity in the tax rates will allow the corporations to move away from the practice of developing warehouse in different states to stick to every state’s tax codes. The companies will instead consolidate these warehouses bringing in a bigger warehouse at critical locations in the country and employing the logistic companies to carry on the further distribution of goods. This will bring in a better management and organized form of logistics favoring the economy.

Disadvantage of the present system:-

The state-border checkpoints which are tasked with material scrutiny and location-based tax compliance negatively affect the overall production and logistics time and account for as high as 60% of the truck’s transit time. This creates inefficiency in timely supply of goods.

Advantage over rival:-

After the implementation of GST as all the check-points are gone, a truck that departs from Jammu & Kashmir will reach on time with no further delay. Goods will be delivered on time satisfying the next link of the chain. Predictability levels will significantly increase after the implementation. People will transfer more volume by road as the logistic manager will be able to predict the further results and the cost of transfer by air will be saved and can be used for other purposes.

The major customers of the logistics who will be benefitted in every manner are:-

• Healthcare and pharmaceutical industry
• Auto and auto components industry
• Lifestyle and readymade garments
• High tech, engineering
• Mobile phones including base towers and mobile telephones

Implementation of GST has a great potential to aggravate the growth of the logistic industry thereby enhancing the development of Indian economy. However, all the repercussions can be studied only after the announcement of the clear rules and regulations of GST. The logistics industry should start exploring different supply chain models with their clients and at the same time develop a completely synchronized ERP accounting system to support inventory supply management as required under the GST regime post the imminent implication of GST.

As mentioned earlier, GST is therefore a game changer for the logistics industry increasing the growth at a surplus rate hence benefitting the Indian economy to transform the developing nation into a developed nation. Hence, it is the biggest reform of the country so far which will impact every sector of the economy.