With today being the seventh day of GST being in action, NITI Aayog CEO Amitabh Kant has told the media about how GST has become a boon for the logistics industry. As per the renowned economists, the GST impact on freight and logistics has created a ripple effect on the prices of many other goods and services in the supply chain. While people are curious to know the new price range of consumer durables and other articles of use, freight and logistics industry could attract only slender attention from the retailers and consumers. However, many doubts pertaining to this topic have been cleared out by the leading economists and newspapers of the nation through ‘impact of GST on logistics industry’ ppts and other informative articles published in news and on the internet.
As per reports, the average freight transport speed in the country has gone up from 20 kmph to 40 kmph in just a week. Also, since the implementation of GST, the average distance covered by freight on a daily basis has risen from 200kms to 400kms. As per Road Transport and Shipping Minister Nitin Gadkari, the logistics costs have already come down and are expected to shrink as much as 20% in the near future. Know more about this down below!
GST Impact on Logistics Industry
The result of 17 tumultuous years has been viewed by the entire world on the midnight of June 30. Bringing together 1.3 billion people and USD 2 trillion economy, the impact of GST on Logistics Sector in India is nothing less than magnanimous. By replacing over a dozen Central and State Taxes, Goods and Services Tax is the country’s biggest tax reform in the last 70 years of Independence. According to the economists, this reform will make way for the modernization of Asia’s third-largest economy in the years to come.
Before GST, the transportation of goods across the state borders was levied with different tax rates. The goods were examined by the state authorities and then levied with appropriate duty on freight which was a cumbersome and time taking process. This usually caused delays in deliveries and called for heavy documentation.
With GST, single tax is being charged on the manufacture, sale and consumption of goods throughout the country. The main aim of having a unified indirect taxation system is achieved with the rollout of this bill, making India a unified common market. Based on the method of Input Tax Credit, Goods and Services Tax is collected at every stage of purchase or sale of goods and services. The interstate transportation of goods has improved and become easier, simplified and more efficient with this new regime.
According to a report by the World Bank, in comparison with the global benchmarks, transportation in India used to take more than the optimal time making logistics cost double, sometimes even triple, as much. In a nutshell, about 13% of the GDP is made up by the cost of logistics in India. This figure can be compared with other western countries where logistics cost is about 8%.
GST Impact on Freight Forwarding
Goods and Services Tax has curbed the taxes involved in interstate and intrastate sales. This has not only made way for the structural re-engineering of the network of logistics but has also expelled the previously existing ineptness. The list of benefits of this Bill for the freight and logistics network is endless. Seamlessness in function, more competent and efficient cross-state transportation, lesser paperwork and reduction in costs are just a few to name. The savings on time comes as a bonus benefit of this Bill.
Not only transportation, the problem of duality of taxes on transactions such as leasing of equipments and goods has also been eliminated. As a result of the uniformity in tax rates across states, the consolidation of warehouses with a simultaneous elimination of smaller warehouses is encouraged. This would indirectly boost the freight and logistics sector in the long run as the supply chain systems will be improved.
However, as fuel makes the major component and cost of this sector, a rise in the prices of fuel has added cost to the whole supply chain. This could be a problem for at least the initial years. Also, electronic permits might come around as a burden on the conduct of business. Hence, it is immensely important to keep a close eye on the aspects of valuation of services. It is important to judge the applicable place of supply to a given transaction, which is another sensitive spot for the industry.
Impact of GST on supply chain
Current Issues and challenges in the freight and logistics industry
The cost of logistic in India is higher than many western countries around the globe because of multiple issues and reasons. Amongst many issues, the major ones include a complex system of taxation and a poor rate of customs efficiency. These issues affect the international export logistics stratum making the industry more expensive and complex. Moreover, the lack of exercise of efficient IT -enabled tracking and tracing mechanisms and the low support and comfort from the existing Indian infrastructure has, over the period of time, negatively impacted the performance of this industry.
Previously, all of India’s states used to levy different rates of tax on goods that cross their borders. This shows that the movement of freight across the country was taxed multiple times. With the Goods and Services tax in action, the taxes levied by the Central (i.e, excise duty, countervailing duty and service tax) and State (Value -added tax, Octroi and entry tax, luxury tax, etc) governments are replaced by a single tax. In other words, on a specific product or service, the same level of taxation is levied across the entire country, irrespective of it being manufactured and sold in another state. The previous rate for most goods was 26.5% which included Cenvat of 14% and VAT of 12.5%. However, with GST, this has been reduced to a fixed rate ranging between 18-21%.
Impact of GST on Third Party Logistic Service Providers (3PL)
GST has cost the Third Party Logistic Service Providers a restructure as they have realigned their operations and assets. Before Goods and Services Tax, the Third Party Logistic Service Providers had located their warehouses very strategically placing them near their key clients and avoiding the interstate taxes. But now, the 3PL’s will have to build integrated warehouses at logistic suitable locations. They have also revamped their assets to make way for the consignments that go a long distance and enjoy the free movement of goods around the country. As for the sector of consumer durables, it has witnessed a massive drop in the cost of logistics as the percentage of total sales has shrunk because of their warehouses being situated in different states. In short, the consumer-oriented industries have experienced a high impact of GST on its operations as compared to the capital intensive industries.
GST Impact on Warehousing
In India, Logistics companies have seen evolution and development from being first-party logistics providers (1PL) to second-party logistics providers (2PL) reaching finally to the integrated fourth-party logistics providers (4PL). The companies provide a complete package which involves transportation, pool distribution, logistics optimization, warehousing and much more. Goods and Services Tax has brought together India’s multi-layered indirect taxation system to form a single tax while releasing the country from the web of bureaucracy and introducing the ease of doing business.
Post GST Logistic Industry Model
The post-GST Logistic Industry Model depicts the following structural changes:
- A large number of warehouses have become fewer and larger making India one big market.
- The overall number of vehicles involved in transportation have depreciated. However, the size of the vehicles might increase eventually as a result of the adoption of the hub-and-spoke model in segments such as warehousing, container freight stations and inland container depots.
- This new regime has led to a lot of savings, stoppage of wastage and fewer instances of delays.
- The involvement of companies in logistic operations will eventually increase manifold as a result of greater economies of scale for transport operators.
Advantages of GST to Logistic Companies
- Cost and Time Saving – GST has led to saving a lot of time and cost for this industry as the new regime has made way for bigger warehouses and logistics planning that is end-market driven. During the transportation of goods via state borders, the addition of 5-7 hours due to entry taxes and cumbersome paperwork at check posts has been cut down. One can now expect easier movement of goods across the country and timely deliveries as a result of abolishment of multiple taxes in the procedure.
- Forward Integration – Customers can look forward to services at lower costs as the companies that do not consider transportation as an integral part of their function will now outsource their goods to third party logistics and fourth party logistics service providers.
- Single Rate – As the the companies now bear a single tax rate across the states, the practice of building multiple warehouses is discouraged. Hence, companies can now focus on sticking to one large warehouse on important locations in the country and make use of logistics companies to manage distribution and supply chains. This practice would save time, effort and cost simultaneously.