Decoding GST for logistics

Goods and Services Tax (GST), scheduled to be implemented from July 1, is expected to develop the logistics sector. In conversation with CARGOTALK, industry veterans note that the tax regime can spruce up the industry.

The logistics sector, comprising of inbound and outbound segments of manufacturing and supply chain, is likely to get a muchneeded boost, through the implementation of GST. Since GST will replace a bundle of indirect taxes imposed by the centre and state; hence the regime is expected to bring down the tax leakage. This will automatically reduce the freight cost.

The government shall roll out GST on July 1, 2017. In an announcement made by Arun Jaitely, Finance Minister, Government of India, the government has kept large number of items under 18 per cent tax slab. Post GST implementation, most FMCG companies will be able to generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. Presently, FMCG companies pay nearly 2425 per cent taxes including excise duty, VAT and entry tax. With a tax rate of 18 per cent under GST. There could be a significant reduction of six to seven per cent in taxes. The minister also mentioned that road transport, air transport and rail transport will come under five per cent slab. As per the market experts, GST will bring healthy growth prospects for the logistics sector. CARGOTALK takes a sneak-peek on the immediate and long-term effect of the tax, once it gets implemented.

Gemunu Rodrigo, CEO, Expo Freight, says, “GST will essentially eliminate the existing inefficiencies and facilitate structural re-engineering of the logistics network. Service providers will be incentivised to leverage hub-and-spoke supply chain networks by operating large central warehouses and remodel transportation routes. This will enable increased consolidation in the industry with large players operating efficiently. Phasing out the inter-state check posts will significantly reduce transportation costs and enhance the ease of doing business.

In the opinion of Sunil Kohli, Managing Director, Rahat Cargo, “The implementation of GST will yield several productive outcomes with fresh establishment of warehousing hubs coupled with an enhanced transportations and logistics services across the nation. Apart from warehousing facilities, these entities in India may now offer a variety of value-added services such as packaging, reverse logistics, bar coding, etc. to provide best services to the consumers.”

“The new taxation system will positively affect the manufacturing chain, supply chain, and retail chain. A strategically placed warehouse not only improves

the consumer services but also facilitates proper supply chain management. It is expected to do well in the GST regime,” he adds.

Strengthening organised sector

Sanjay P Rathi, Managing Director, Sampark India, comments, “The tax will strengthen the companies in organised sector as opposed to the unorganised sector, since the customers will be allowed to offset services tax under GST. India’s logistics sector will be overhauled with the implementation of the GST and schemes such as Dedicated Freight Corridor (DFC) as well as logistics hubs will be quantum leaps along with helping control the inflation. The implementation of GST will lead to lower transit time and thereby generate higher truck utilisation,” in adding, “This will boost demand for high tonnage trucks and lead to overall reduction in transportation costs. It will facilitate seamless interstate flow of goods, which is expected to directly accelerate demand for logistics services.”

Krishnakumar V, COO, Agility India, notes, “Due to wide spectrum of taxes for each of India’s states and union territories, the freight that moves across the country, is taxed multiple times. With GST, companies will now look to reshape their distribution models to the change in tax geography. The speed of movement of goods should improve, and we should expect more innovative business models.”

Bhavik Chinai, Founder & CEO, Vamaship, says, “Effective implementation of GST would transform logistics industry in India. All customs and SME business will have a new perspective for business after GST. It will redefine the way Indian logistics work and will flourish business of organised players of the sector.”

Anshul Singhal, CEO, Embassy Industrial Park, tells, “The GST regime promises one country; one tax. With GST, there will be promotion of trade, improvement of investment climate and an overall rise in GDP. The first beneficiary will be the logistics and transportation sectors. It will unshackle India from its bureaucratic web and improve the ease of doing business.”

“The sector is largely fragmented and comprises of many unorganised players. Several players in the unorganised sector avoid tax which generates a cost gap between them and the organised players. With GST coming into picture, we expect an overall positive impact, with a reduction in the cost competitiveness as all the players will be brought under a uniform tax base, thereby improving growth opportunities for the organised players,” notes Rathi.

“The whole process involved in migrating from the current status quo to the post GST scenario mandates a high level of transparency, discipline to timelines, sticking to compliances. This is no doubt good news for those who have always towed the line and have invested in IT platforms that will facilitate transparent and real time transactions. This will lead to some amount of consolidation amongst service providers, while ensuring that service users will now deal with increasingly improved and organised service partners,” feels Vikram Mansukhani, Head-3PLs, DIESL.

The ripple effect

Estimating that the full impact of GST will be visible in the next 12-18 months, Krishnakumar, says, “The immediate effect is to provide all players with a common set of taxations where taking input credit will be easier and more transparent. So both manufacturers and service providers will have better visibility on actual costs, and therefore can be more competitive. In the medium term, closure of border check posts along with improving infrastructure will allow for faster transportation of goods across the country, which will lead to optimisation of distribution centers, and lower the cost of inventory carried.”

Commenting on the same, Jaideep Raha, Managing Director, Jetex OceanAir, believes, “Immediate changes will be primarily in the accounting software that could somewhat be a problem for us but in the long-run, this will simplify our billing process.”

Talking about the benefits to logistics firms from medium to long-term, Rathi, notes, “Q2 FY18 onwards, the implementation of GST is almost certain and supply chains in the domestic market are expected to undergo major overhauling. As GST framework will be impressing upon logistics companies to restructure their network, we expect higher efficiency to prevail despite of necessary margin impacting compliance costs. Even though, there is availability of information on the new tax structure, the real impact on logistics remains unclear. The evolution of the sector is a true barometer of the economy as the sub sectors, especially warehousing and transportation.”

“Depending upon the state of development, transportation sector either expands or contracts (as a per cent of GDP) while warehousing remains almost constant. While contribution of overall logistics is just under three per cent of the US GDP, the sector contributes near eight to nine per cent of India. The understanding here is that a higher value to the overall economy pushes down the cost of transportation and storage over the years. This is apparent from the low inflation recorded in developed economies while persistently high in EMs and poorer economies,” he adds.

Sharing his perspective, Mansukhani says, “The immediate changes would stay around a heightened focus on ensuring that all service providers are GST compliant and that a timely accounting reconciliation is possible between the user and the provider to ensure that possible inputs credits are maximised. This would present an opportunity for some level of integration between the user and provider ERPs. In the longterm, quite clearly, there would be between 25 to 30 per cent reduction in number of warehousing locations and this decision will be driven by the need for ‘Speed to Market’. Transportation will require increased focus and investment to ensure the quality of vehicles and drivers is significantly improved to ensure faster transit times while remaining visible in real time through the journey.”

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Similarly, Kohli feels, “The introduction of GST might open new forays for the organised sector as well as help to align the unorganised players. The consolidation of various tax components involved in the transportation of goods and services will result in increased efficiency of business as a whole and will facilitate borderless movement of goods.”

Talking about the immediate effect, Chinai highlights, “Entire unorganised space will have the short-term negative impact; such as inaccurate filing in terms of finance will have an adverse effect. But in the long-run, e-commerce

industry will get an incredible boost. Technology based start-ups will able to flourish their business because of the way they have done their foundation.”

However, as per Rodrigo’s anticipation, the Indian logistics industry will be able to migrate to a more efficient supply chain model from the present model which is dependent on tax considerations vis-à-vis operational considerations in the medium-to-long-term. “GST will be a key enabler for business to revamp their supply chain, in accordance with various business considerations and offer faster and better facilities to clients,” he adds.

Are we prepared?

Talking about the preparedness, Krishnakumar informs, “Agility is preparing and we expect to be ready with the necessary systems, as well as the physical infrastructure to function effectively in the new regime. We are interacting with customers, vendors and employees and other stakeholders about the changes in the tax structure and what steps we are taking to support their business. Moreover, there are multiple stakeholders in the industry and they are at various stages of preparation.”

“It almost seems like will there ever be a right time? The industry is some distance away from being ready, also further delayed by some specific queries on transportation remain ambiguous with not much of a relief on transit passes or waybills to enter different states. The GST implementation in phase one would focus more on accounting reconciliations rather than location decision on the supply chain network. Phase 2, which is possibly six to nine months, post GST implementation will focus on redesigning an optimum network. By this time, some new transportation routes which are today only conceptual in nature may well become reality,” opines Mansukhani.

Expressing optimism, Singhal says, “It is more than ready. India has a mature business environment now. The Indian players have already started hosting GST seminars, training and started thinking about how to make the transition as smooth as possible.”

“With new forays for the organised sector as well as help to align the unorganised players, this is expected to increase the overall volume of the business as delays through multiple check posts and entry points will be reduced. We are GST-ready, whether it is with respect to the issue of invoice or receipt of payment, we will comply as required,” shares Rathi.

Raha says, “Certainly it will make our tax calculation much easier. It will eliminate the present days’ confusion between the forwarder and the customer since we differ on the levying of tax on certain services and charges that are billed as there is not much of clarity at present.”

On the other side, Chinai believes, “We need more time; the mass number of players are unorganised. Few days or weeks would be good enough but September will be a bug jump.”

Nurturing logistics

The tax is being rolled out next month, but, there are few factors that needs to be managed. Rodrigo says, “Simplicity in its implementation and lower tax for the industry would be helpful.” From the service provider’s perspective, Krishnakumar shares, “LSPs need to be prepared on the systems front, to be able to complete their commercial transactions in a compliant manner in the new GST environment. The other important factor will be the ability to make changes in infrastructure such as distribution centres as per changing customer requirements in the medium term. It is also important to complete basic requirements like GST registrations, etc which are all part of the preparation for the change.”

Mansukhani notes, “Creation of high quality logistics parks, which have some subsidy for operating within that area, driver training and alleviation programmes, recognising logistics as an industry are some of the high-level actions that should ideally proceed implementation of the regime.”

Kohli enumerated following points that needs concern while implementing the tax:

To render optimal incentives to the logistics sector in India, a lower GST rates for capital equipment and input services for setting up warehouses and other infrastructure should be provided.

Check posts and Airway Bills should be eliminated under the GST regime.

For services rendered to the e-commerce industry, the vendor or the market place should not be liable to GST.

International freight should be zero rated.

Ancillary services for export should be zero rated. Aviation turbine fuel (ATF) is excluded from the purview of GST for at least two years after the implementation of GST.

The first beneficiary will be the logistics sector. It will unshackle India from its bureaucratic web and improve the ease of doing business

With GST, the speed of movement of goods should improve, and we expect more innovative business models

The implementation of GST will lead to lower transit time and thereby generate higher truck utilisation

Phasing out the inter-state check posts will significantly reduce costs and enhance the ease of doing business

In addition, Rathi lists, “Current exemptions extended to FTWZ should be extended under the GST regime and supplies to FTWZ should be zero rated.”

According to Raha, phase wise implementation and to have a reversal Dry Run of the GST is important for first three months alongside the present-day taxation system.

Chinai stressed on simplified and practical e-Airway Bill. “This can revolutionise the trucking industry. And, not to forget service tax regime nedds to get more clarity,” he opines.