What the newly minted GST means for various industries

Effect of GST on Logistics and other industries

On 8th August, 2016, the Goods & Services Tax Bill (aka GST Bill) was passed, with some amendments, by the Lok Sabha; earlier in the month, it was cleared by the Rajya Sabha on 4th August. Now, it needs to be cleared by at least half of the total number of States and Union Territories in India before it can be presented to the President for a final sign-off.The GST Bill has been hailed by a large cross-section of businesses and general public as a much-needed reform to replace the numerous indirect taxes imposed by states and the centre, e.g. Service Tax, Central Excise Duty, Surcharges & Cesses, etc. (levied by the Centre) and VAT, Entertainment Tax, Entry Tax, Luxury Tax, Surcharges & Cesses (levied by individual states). The government is determined to implement the GST from 1st April, 2017. Implementation of the GST will result in a uniform market across the country.

Let us take a good look at whether the GST will really help or hinder various businesses.

Logistics

One of the areas which will be majorly affected by the introduction of the GST is the logistics business. Here are a few ways in which application of a uniform GST will help logistics in India:

  • Lower logistics costs: As of now, when goods are transported across states, every state that the consignment passes through levies its own tax, which is different for different states; the result is that the goods are taxed multiple times. Not only that, a corporate tax of 2% is applied on top of this, thus increasing the final cost of the goods. This complicated, multi-step cascading tax pattern severely hinders the profitability of the manufacturer in several ways. Maintaining inventories in every state in order to avoid paying taxes in inter-state transfer of goods leads to high operational costs.
  • Easing of checkpoint logjams: Considering that almost 80% of the freight in India moves by road, and that tax is assessed and applied at every state checkpoint, it is no surprise that there are long delays and bottlenecks at all state checkpoints. If state border checkpoints are phased out, this will directly result in elimination of delays in goods transport and delivery. It is estimated that trucks spend about 30-40% of their transport time in waiting for various tax/duty clearances such as entry tax, local body tax, OCTROI and so on. Introduction of GST will eliminate the taxing process at every state checkpoint, thus reducing the ‘down time’ of trucks and goods carriers, improving speed and efficiency of delivery.
  • Streamlining of warehouses: Under the current system, a manufacturer prefers to maintain warehouses in every state that it does business in or its goods travel through, to circumvent the taxes levied on goods moving from one state to another. With the implementation of GST, interstate transport/transaction will be eligible for tax credit, also companies will no longer need to have warehousing facilities in every state, leading to massive opportunities for warehouse consolidation and cost optimization. Instead of having a warehouse in each state, manufacturers can have warehouse clusters catering to multiple neighbouring states, drastically reducing not just warehousing operational costs but also costs of stocking inventory in every state, and the related labour costs.
  • More logical 3PL locations: Currently, third-party logistics (3PL) companies choose to build and operate their warehouses from locations close to the manufacturing centres in order to avoid interstate taxes, rather than locate them in logistically meaningful sites. With the removal of interstate taxes, they will be able to reposition the warehouses to more suitable locations and also streamline the entire transport chain for better efficiency.
  • Consolidation of a fragmented industry: The present taxation system is complex and often frustrating. However, it does give rise to several dubious players in the large and disjointed industry of logistics. A common and comprehensible tax structure will assist in unifying and streamlining the various players in this field and bring more clarity in the business.

 Apart from the logistics industry, what effect does the GST have on other industries? We list a few:

  • Fast-Moving Consumer Goods (FMCG): As major users of logistics services, they would save enormously in distribution, warehousing and transport costs. A GST of about 18% would be significantly lower than the current rate of 24-25% tax that includes VAT, excise duty, entry charges, etc.
  • E-commerce: With the elimination of different levels of taxation across the country, a unified single market will largely help the e-commerce business. The seamless cross-country flow of merchandise and elimination of expenditure due to extra inventory will boost productivity while bringing down operational costs. Also, the market might expand to include more customers; as of now, consumers from some states are unable to order certain products online due to intricacies of entry tax and so on. Customers will also stand to benefit due to the ultimate reduction of product costs.

However, with the introduction of GST, one possible point of pain might be that, since GST is a ‘destination’ tax, payment and related compliance will be the e-commerce company’s responsibilities and not the sellers’. Hence, the ecommerce company will have to deal with more paperwork.

  • Automobiles: The automobile industry remains one of the most heavily taxed sectors in the country. The substitution of multiple state and central taxes with one common Goods and Services Tax will result in an overall reduction of taxes for automobile manufacturers.

Moreover, as the GST is likely to lower the overall logistics and supply chain inventory costs (as seen in earlier paragraphs), the ‘on-road’ prices of vehicles are expected to drop considerably, by as much as 8%. It is hoped that this would give a huge fillip to the demand for cars across the country and, in effect, provide a boost for the Indian automobile industry.

As of now, the GST bill is in the process of getting ratified by individual states; so far, Assam, Bihar and Jharkhand have ratified it. While there are some fears of loss of revenue due to GST, the majority opinion of industry mavens and consumers is that it will bring tax parity across the nation and be instrumental in reducing corruption at multiple levels.

In effect, Indian industries as well as consumers are awaiting the arrival of the Goods and Services Tax with a lot of hope and expectation as the deadline of 1st April, 2017 inches closer.

Subscribe Here!

Recent Posts

Social

Silver Lining Storage Solutions

Subscribe to SILVER LINING blog posts

RSS Feed