Effect of GST on the logistics sector
GST is a welcome move for the logistics sector.
GST is a welcome move for the logistics sector
Goods and Services Tax (GST) would have come into play by the time this magazine hits the stands. For the logistics sector, it is a welcome move. Replacing taxes levied by the central and state governments, GST will impact the logistics sector on at least two counts. First, with the central sales tax regime giving way to GST, inter-state barriers for domestic trade will go away. This will reduce the transit time. Warehouse locations for various principals could be rationalised such that they can consider secondary distribution from larger and fewer warehouses into territory governed by logistical considerations rather than administrative considerations like state boundaries. Second, with uniform taxation for a product across the country, sourcing distortion and sales in ‘tax haven’ states at the cost of logistical optimisation will reduce. The effectiveness of both will depend on the robustness and population of the IT-based GST Network (GSTN), which would allow for online reconciliations.
In-line with the federal structure of India, GST will have
two components – Central GST (CGST) and State GST (SGST). Both, the Centre and States will simultaneously levy GST across the value chain. Levied on the supply of goods and services, Central GST would be levied and collected by the Centre. The States, at the other end, would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. In the case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all interState supplies of goods and services under Article 269A (1) of the Constitution. The IGST would be roughly equal to CGST plus SGST. For the transport sector, GST, at one level, would rationalise transport flows. GST would reduce travel times from the origin to destination. There is a possibility of a modal shift from road to rail, with the possible impetus to the growth of logistics parks as aggregation and dis-aggregation centres.
The transportation sector will attract five per cent GST with specified input credits. I am hoping that more branded play will come into this sector. This will call for larger trucking companies, with a larger share of owned trucks. The need for localised small single truck entities will reduce. In general, the influence of GST
on trucking would be on the positive side. Long-haul truck operators will gain more. The difference in GST rates versus the current tax rates for special cargo will affect special cargo truck operators. It is also likely that buyers will avoid dealing with non-registered suppliers due to higher burden of compliance. A short term phenomenon it will be. In the long term, compliance will have to be achieved. There will thus be more players in the organised sector. The pressure on income of a truck operator is already there. I hope that taxation on fuel would come down, especially if tax collections due to GST, and due to an increasing net of service tax, go up. Any attempt by states, which would result in differential taxation across states, would defeat the purpose of GST. It will create distortions in sourcing of critical inputs.
Since more than one tax is merging into GST, there is no need for formalities (paperwork) to get more complex, and for the overall taxation process to turn more challenging. Paperwork will, in fact, reduce. State border checks should disappear eventually. They make take a while to disappear, even after the introduction of GST, since states would follow a wait and watch policy. More importantly, the introduction and robust functioning of the GSTN would influence this. It is not clear if businesses would shut down as a consequence of GST, except for small warehouse service providers and tax intermediaries. The impact on tax collection is unlikely. The input tax credit along with GSTN can be a potent force in increasing tax collection across a wider net of players. Most of the players who would come into the net would be small players. It would thus impact distributors and dealer networks as well as small vendors. About input tax credit, and its ways of working, the overheads of small players would increase since the bigger players in the supply chain would want them to be a part of GSTN.
The hub and spoke model will become sharp. Hubs will be determined more on logistical consideration than state boundaries. CV sector demand could reduce marginally, due to flow optimisation and a possible shift towards rail transportation between major hubs. However, economic growth due to better tax collection will result. This would lead to an increase in overall consumer demand, the result of which will be greater transportation demand. On the other hand, more investments in infrastructure would lead to higher vehicle utilisation, and reduce the demand in this sector. GST will influence local manufacture. Manufacturers in states having lower taxation will find it a bane, while those in states where taxation is high will find it a boon. While CV sales can happen directly than through tax havens, component manufacturers will increasingly move into the organised sector. If the taxation of CVs and tyres at 28 per cent, and of tractors at 18 per cent may be surprising, it would be worth acknowledging that CVs and tractors address different segments. If it looks like a disparity, I don’t think it will matter. While GST will have an impact on the CV industry, it will not exactly overhaul it. -------------------------------------Prof. G Raghuram is the Director of Indian Institute of Management, Bangalore.
⇩ xxx The influence of GST on trucking would be on the positive side.
⇧ GST rates versus current tax rates for special cargo will affect special cargo truck operators.
ØThere will be growth impetus on logistics parks as aggregation and dis-aggregation centres.