GST for the trans­porta­tion sec­tor

GST for the trans­porta­tion sec­tor and the com­mer­cial ve­hi­cle in­dus­try will dial sig­nif­i­cant changes.

Commercial Vehicle - - INDUSTRY TALK - Story by: V G Ra­makr­ish­nan

GST would have rolled out by now, not re­lent­ing to the ris­ing clam­our for de­fer­ring it by a few months from a wide range of in­dus­tries, and the bank­ing sec­tor. Apart from the dead­line to im­ple­ment GST, much has been dis­cussed about its im­pact from the prod­uct tax­a­tion point of view; from the in­fla­tion point of view, and from the GDP growth per­spec­tive among oth­ers. The tran­si­tion to the new tax regime un­der GST is likely to have a neu­tral or slightly pos­i­tive im­pact on the com­mer­cial ve­hi­cle in­dus­try. Pri­mary ben­e­fit would ac­crue from the re­moval of cas­cad­ing taxes. Ex­perts from di­verse fields are of the opin­ion that GST in its cur­rent form does not dif­fer much from the tax it will re­place in terms of

com­plex­ity, the num­ber of tax slabs, and the huge bur­den of in­creased paper work.

With close to 60 per cent of the GDP con­trib­uted by the ser­vice sec­tor, In­dia in 2017 is largely a ser­vice driven econ­omy. Man­u­fac­tur­ing ac­counts for 25 per cent of the GDP. With GST sim­pli­fy­ing a mul­ti­tude of taxes on man­u­fac­tured goods, com­pli­ance bur­den has in­creased sig­nif­i­cantly on the ser­vices sec­tor, in­clud­ing the trans­porta­tion sec­tor. If the ex­ist­ing sys­tem re­quires ser­vice providers to pay ser­vice tax at a flat rate and file re­turns twice a year, un­der GST, the num­ber of forms that are re­quired to be filled in­creases to 37 in a year. This will lead to an in­crease in the com­pli­ance costs. Ser­vice or­gan­i­sa­tions that op­er­ate in mul­ti­ple states will have to reg­is­ter in each state that they op­er­ate in. This would be ne­ces­si­tated by the com­plex struc­tur­ing of GST into Cen­tral GST and State GST. Many be­lieve that GST is VAT 2.0 with im­prove­ments thrown in for good mea­sure.

GST, there is no doubt, is a game changer. What­ever may be its short­com­ings as of cur­rent, it is a game changer since it cre­ates a sin­gle mar­ket with uni­form tax rates across the coun­try. This sin­gu­lar change has the po­ten­tial to have a wide rang­ing im­pact on the trans­porta­tion sec­tor. It also has the po­ten­tial to have a wide rang­ing im­pact on trans­port com­pa­nies and truck man­u­fac­tur­ers for years to come. GST is not the largest trans­for­ma­tive tax leg­is­la­tion to ei­ther trans­form or dis­rupt the In­dian econ­omy. For the trans­porta­tion and com­mer­cial ve­hi­cle in­dus­try, GST is ex­pected to bring about a sig­nif­i­cant change. Changes that would broadly fo­cus on the fol­low­ing fac­tors: sales vol­ume, seg­men­tal shifts, an­cil­liary busi­nesses tran­si­tion­ing to the or­gan­ised side, and OEMs de­vel­op­ing strong po­si­tions and rev­enue streams. Changes would also broadly fo­cus on fac­tors such as the trans­for­ma­tion and con­sol­i­da­tion of the trans­porta­tion in­dus­try. If and how the pur­chas­ing power of large fleet op­er­a­tors can be in­creased, and the im­pact on brand pofitabil­ity among oth­ers.

Ware­house trans­for­ma­tion

The im­mi­nent change GST will drive is the re­design of ware­house net­work. His­tor­i­cally com­pa­nies op­er­ated ware­houses in var­i­ous states to avoid mul­ti­ple tax­a­tion. These ware­houses were in many cases sub-op­ti­mally de­signed. They were used only to add ad­di­tional costs across the sup­ply chain, both in-bound and out-bound. With GST do­ing away with the need to main­tain ware­houses across states, man­u­fac­tur­ers are quickly re­or­gan­is­ing ware­house lo­ca­tions by shut­ting down sub-op­ti­mal fa­cil­i­ties and con­sol­i­dat­ing into larger spaced fa­cil­i­ties. In many cases or­gan­i­sa­tions are cut­ting down the num­ber of ware­houses they have had by more than half, or by one third of their orig­i­nal net­work strength. Com­pa­nies in high ve­loc­ity in­ven­tory turns sec­tors may still con­tinue to op­er­ate with many ware­houses since their re­quire­ment is de­mand driven than be­ing tax pol­icy driven. The out­come of such ra­tio­nal­i­sa­tion is ex­pected to re­sult in lesser yet larger ware­houses that are markedly au­to­mated.

While it is likely that many com­pa­nies will ac­tively cre­ate or en­hance ware­house closer to the man­u­fac­tur­ing lo­ca­tion as this will in­crease their abil­ity to stock and ser­vice low vol­ume prod­ucts and im­prove ef­fi­ciency, the im­pact of this re­for­ma­tion in ware­house net­work will im­pact trans­porter route plans,

fre­quency of routes and ve­hi­cle ton­nage re­quire­ment. As more goods are trans­ported to larger stock hold­ing ware­houses, trans­porters will re­quire higher ton­nage trucks since the prob­a­bil­ity of cor­po­rates trans­form­ing to full load trucks over par­tial loads will be high. This trend is ex­pected to in­crease de­mand for higher ton­nage trucks in the next two-to-three years. Com­mer­cial ve­hi­cle man­u­fac­tur­ers can ex­pect a fur­ther ac­cel­er­a­tion of growth in the seg­ments above 25-tonnes.

New routes will emerge as com­pa­nies re­lo­cate ware­houses to lower cost lo­ca­tions; lo­ca­tions with larger land avail­abil­ity. Mar­ket ac­cess and costs in bal­ance will also play a role. This change will over time lead to the cre­ation of a hub and spoke model. Mar­kets par­tic­u­larly in East and parts of North In­dia (like Pun­jab, Haryana, Hi­machal Pradesh, J&K and Delhi) are likely to move faster in cre­ation of hub and spoke mod­els. Over the long term, ve­hi­cles with less than two-tonnes will pre­dom­i­nantly serve last mile con­nec­tiv­ity. Ve­hi­cles in the four and 10-tonne seg­ment (LCVs and some ICVs) will serve as a con­nec­tion be­tween the hub and spoke. Ve­hi­cles over 25-tonnes will serve as a con­nec­tion be­tween man­u­fac­tur­ing lo­ca­tions and the hub.

Since the trans­porta­tion in­dus­try op­er­ates on the ba­sis of growth by ton­nage, higher eco­nomic growth may not nec­es­sar­ily trans­late into higher vol­ume growth for truck man­u­fac­tur­ers. Seg­men­tal shift to higher ton­nage will be ev­i­dent over the medium and short term as the mar­ket ad­justs to a struc­tural change. From a freight stand point, de­mand for larger trucks could push freight rates up, and un­til the mar­ket reaches a bal­ance. As the size of trucks in­creases, ticket size of trucks will grow. The abil­ity of trans­porters to in­vest in busi­ness will rise too. While ser­vice debt could af­fect fleet ac­qui­si­tion plans, it cou­pled with the im­ple­men­ta­tion of Bharat Stage IV emis­sion norms will in­crease ve­hi­cle prices sig­nif­i­cantly. It is fairly es­tab­lished that the cost of BSIV up­grade will be sig­nif­i­cantly higher (as a per cen­t­age of the prod­uct cost) in lower ton­nage ve­hi­cles com­pared to higher ton­nage ve­hi­cles. The com­bined fac­tors of emis­sion up­grade and GST could churn the trans­port seg­ments. One pos­si­ble sce­nario that may emerge is of large trans­porters in­creas­ing their grip on first mile. Medium-sized op­er­a­tors could op­er­ate pre­dom­i­nately in the hub to spoke seg­ment, and small and in­di­vid­ual truck­ers op­er­ate the spoke and last mile based on their fi­nan­cial ca­pa­bil­ity. Trans­porters could in­crease their fo­cus on niche seg­ments, which re­quire par­tic­u­lar ve­hi­cle type to op­ti­mise the bal­ance sheet.

Sup­ply chain and ven­dors

GST is ex­pected to drive changes in the busi­ness model across sec­tors. The trans­porta­tion sec­tor will have to evolve quickly. Two as­pects of GST, cho­sen as ex­am­ples, pro­vide an in­di­ca­tion of the changes that will sweep the trans­porta­tion sec­tor. First, the score sys­tem – sim­i­lar to credit rat­ing scores pro­vided for each reg­is­tered en­tity, will re­flect an en­tity’s ad­her­ence to tax sys­tem, process and pro­ce­dure. Cor­po­rates and com­pa­nies can choose who to con­tract trans­porta­tion based on the scores. As GST works on the prin­ci­ple of in­put tax credit, only

those ven­dors and sup­ply chain part­ners that file re­turns, will at­tract busi­ness. Trans­porters will have to main­tain clean books of ac­counts and re­frain from tax avoid­ance to avoid the risk of los­ing busi­ness. Com­pa­nies and cor­po­rates look­ing for in­put tax cred­its will choose ven­dors that ad­here to the new tax regime. GST is ush­er­ing in an era where mar­ket will reg­u­late tax pay­ment prac­tices. Sec­ond, is the e-way bills. e-way bills will have an im­pact on the way trans­porters func­tion. In this re­gard, GST is cre­at­ing a dig­i­tal foot print of each trans­ac­tion and trans­port. Ev­ery e-way bill will have a cer­tain pe­riod of va­lid­ity. Trans­porters would be re­quired to com­plete the de­liv­ery within the stated pe­riod. This will act as a huge de­ter­rent for trans­porters, mar­ket load op­er­a­tors and small trans­porters in par­tic­u­lar, against de­lay in de­liv­er­ing the cargo. A new e-way bill (from the con­signer) will have to be gen­er­ated be­yond the va­lid­ity pe­riod. Trans­porters will need to evolve their busi­ness prac­tices. GST will call for a change of mind-set.

Or­gan­i­sa­tional change

The prime ob­jec­tive of GST is to bring more and more trans­ac­tions un­der the tax net; to in­crease trans­parency and com­pli­ance. The thresh­old for com­pa­nies to reg­is­ter for GST has been low­ered to Ru­pees-two mil­lion per an­num as com­pared to Rs.10 mil­lion per an­num limit in the past. Com­pa­nies that were ex­empt from tax will now come un­der the tax net. This has the risk of mak­ing their prod­ucts more ex­pen­sive, and less com­pet­i­tive, as com­pared to the prod­ucts pro­duced by large-size or­gan­i­sa­tions. The econ­omy on the whole, is likely to get more or­gan­ised. With in­crease in com­pe­ti­tion, smaller sized or­gan­i­sa­tions are likely to ‘pro­fes­sion­alise’ their op­er­a­tions, and grow to scale or exit. This trend is ex­pected to play out among trans­porters as well. Trans­porters are also ex­pected to en­gage in busi­ness trans­ac­tions with ven­dors that are or­gan­ised. This will en­able them to ben­e­fit from in­put tax credit. While the cur­rent prac­tice of con­sign­ers pay­ing the tax on trans­porta­tion will con­tinue un­der GST, trans­porters that pro­vide ad­di­tional ser­vices will even­tu­ally charge GST and take credit for many in­put items like lubes, in­surance, and tyres among oth­ers. Some of the ser­vices of­fered by road­side ser­vice providers like tyre re­tread­ing, re­pairs and main­te­nance are to come un­der the GST net. They will thus move up the value chain as GST com­pli­ant en­ter­prises. The ve­loc­ity of this move­ment will in­crease af­ter the gov­ern­ment brings petroleum prod­ucts un­der GST. With in­creas­ing com­plex­ity in trucks, truck man­u­fac­tur­ers can look at an in­crease in main­te­nance con­tracts, in­crease in the quan­tity of ve­hi­cles ser­viced, and at au­tho­rised ser­vice points.

Trans­for­ma­tion long­haul

GST trans­for­ma­tion is about change in money (tax re­form), mat­ter (busi­ness process, model) and mind (com­pli­ance). Rather than an overnight trans­for­ma­tion, it will take time. Ev­i­dence of change will emerge only in the next 24 to 36 months. Any ex­pec­ta­tion of a quick change will lead to ex­pec­ta­tion mis­match and dis­ap­point­ment. GST en­tails a long-haul. It en­tails a long-haul jour­ney for the trans­porta­tion and com­mer­cial ve­hi­cle in­dus­try to re­alise the ben­e­fits. With GST the trans­porta­tion sec­tor and truck mak­ers are em­bark­ing on a jour­ney that will lead to a sig­nif­i­cant im­prove­ment in pro­duc­tiv­ity, cost ef­fi­ciency and growth. ---------------------------------------V

⇧ Ser­vice or­gan­i­sa­tions are re­quired to reg­is­ter in each state that they op­er­ate in.

⇧ Cost of BSIV up­grade will be sig­nif­i­cantly higher in lower ton­nage ve­hi­cles com­pared to higher ton­nage ve­hi­cles.

ØTrans­porters will have to main­tain clean books of ac­counts and re­frain from tax avoid­ance to avoid the risk of los­ing busi­ness. G Ra­makr­ish­nan is the Man­ag­ing Di­rec­tor and Part­ner of Avan­teum Ad­vi­sors.

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