India’s logistics industry is worth over $130 billion and is critical to the country’s plans to mature into an economic superpower. However, it wouldn’t be possible unless a more efficient logistics industry is in place
The GST will be implemented this year. The new law is expected to help the overall growth of economy and a softening in prices and may even translate into a 2 percent GDP growth, according to experts. Besides making taxation simpler, the GST will impact all industries, of which the most remarkable effect is expected to be on transport and highways.
India’s logistics industry is worth over $130 billion and is critical to the country’s plans to mature into an economic superpower. However, it wouldn’t be possible unless a more efficient logistics industry is in place. The GST is expected to remove bottlenecks in the full-fledged development of logistics infrastructure and lead to smoother transport system. The GST would replace the obsolete and inefficient transport system of yore that was built around the state taxation system.
Analyzing the problems of the logistics industry Logistics should ideally make commercial activities efficient, but it is caught in the web of complex rules and regulations. There is a lot of paper work involved that impedes the flow of goods. Transporters are required to have in their possession hard copies of invoice as well as various forms. All this leads to enormous delays. The GST, however, will eliminate queues at state border checkpoints. Documentation will be simplified. All this should cut down the high average waiting time and stoppages on highways.
With a single GST in place, monitoring and collection of sales tax at interstate barriers would be obviated. A survey estimates that if the waiting time of trucks at various interstate checkpoints is reduced by half, it will lead to an additional 8 percent trucks on highways. The GST would translate into increased uptime for trucks, decrease in idle hours, better turnaround times and optimized warehousing structure.
The current scenario is however far from ideal. Currently, central and State governments levy different taxes separately. A Ministry of Road Transport and Highways report says that a typical truck spends 16 percent time at check-posts. On an average, a truck in India runs an annual distance of 85,000 km compared to 150,000 to 200,000 km in Western countries. The industry is fragmented due to the state-level tax structures, which forces enterprises to put up warehouses in every state. This makes the supply chain longer than necessary and to a certain extent inefficient. Additionally, due to the complex tax structure, the transport industry spends 50-60 percent of resources on tax compliance and deposit of interstate sales tax.
“The GST eliminates double taxation and enables a shared national market. This leads to better collections. Most importantly, the GST prevents or at least de-incentivizes tax evasion,” says Somesh Misra, VP, Product, Deskera.
GST would bring startups and SMEs at par with big corporate houses
Currently, big corporate houses “stock transfer” goods to other states and avoid paying tax on interstate movement. However, that is not the case with small players. Due to lack of infrastructure, SMEs and startups can’t do that and have to procure goods through interstate sales (in the place of stock transfers) and have to pay Central sales tax on them. In this regard, the GST brings startups and SMEs at par with the big corporate houses as stock transfers would be taxed as well.
Logistics includes transportation, warehousing, distribution and optimization. The GST will lead to concentrated logistic supply chains which are efficient, eventually leading to centralization to make the process of claiming credits easier. Tax compliance hitches would also get resolved. Regional warehouse hubs would emerge since a manufacturer won’t need warehouses in every state. This would lead to centralization of resources and consolidation of the industry.
I expect key business hubs to emerge. Manufacturers can, therefore, have a hub, for instance, in Delhi which can cater to the entire north region, doing away with the need to have a separate warehouse for every state separately. The logistics chain, consequently, becomes leaner and smarter.
All said and done, the GST is not effective now and only time will tell the exact effectiveness of the new law after its implementation. The proof of the pudding is in the eating.