Elektrans Global

GST to cut logistics costs upto 20% by April 2016

Goods and Services Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. One of the biggest taxation reforms in India, GST is all set to integrate Centre state economies and boost overall growth.

The Govt. of India first proposed that a number of indirect taxes levied by the Centre and states be replaced by the GST, several years ago. The GST project now seems underway and it is hoped that the GST bill will be cleared soon to enable it to be implemented from April 2016.

Complex and Cascading indirect taxes have been one of the key reasons impacting the competitiveness of Indian manufactures over the years. Alongside operational efficiency, tax avoidance has influenced the supply chain decisions of corporates, resulting in small and in-efficient warehouses and high logistics costs.

Once, the GST is introduced, ‘tax avoidance’ will no longer influence decisions concerning distribution network and total warehouse space can be reduced practically. Savings will accrue in three forms:

a)  Tax savings  b) Logistic cost savings  c) Elimination of check posts offers additional costs savings.

GST in India is expected to be implemented from April 2016 with proposed revenue neutral rate of 18 – 22 per cent (exact rate not yet finalized). The structure of GST comprises of State Level GST (SGST) and Central Level GST (CGST). SGST will absorb VAT/sales tax, Entertainment Tax, Luxury Tax, and Tax on Lottery, State Cess and Surcharge. CGST will absorb Central Excise Duty, Additional Excise Duty, Service Tax, Additional Custom Duty, surcharge, Education cess. Thus, integrated GST will total both of these - SGST and CGST.

The GST will have an impact on industries viz FMCG, Consumer durables, Pharmaceutical, Automobiles etc. Industry wise current logistics cost 8 to 9 per cent for FMCG, 7-8 per cent for Consumer durables, 5.5-6.5 per cent for Pharma, 5 to 6 per cent for Automobiles in terms of percentage of sales. There will be savings in logistics costs to the tune of 1.5 to 2.0 per cent as a percentage of sales on and average for all these sectors. This may amount to reduction upto 20 per cent in the logistics bill. Most of the companies have set up warehouses to save Central Service Tax and to be closer to retailers for logistical reasons. After GST implementation, companies will consolidate their warehouses and minimize the numbers to around 25 to 30 per cent from existing warehouses in turn saving cost for setting it up and running repairs and maintenance.

Some of the benefits of GST include tax savings, savings from consolidation, and lower transportation time due to dismantling of border check posts. Besides companies directly impacted from GST there are others that have to maintain warehouses for geographical penetration. There are around 650 odd check posts across pan-India. Truck drivers in India spend 60 per cent of their time negotiating check posts and toll plazas. This leads to increase in freight traffic and productivity loss. Thereafter, higher productivity would cut the need for buffer stocks, reduce the loss of perishable goods and cut down the need for many warehouses.

The GST formation will be the most admirable change since last decade and is expected to change the face of the Indian economy. The tax revenue of the Government will increase about 0.2 per cent according to National Council of Applied Economic Research because of GST implementation. While GDP growth could go up by 0.9 to 1.7 per cent over the years.

On the whole, supply chain inefficiency is a major obstacle to manufacturing growth and competitiveness, and the goods and service tax (GST) offers a unique opportunity for the Indian government to reform logistics networks in the country. Overall, an estimate has been made that Indian companies pay up to 10-14% of their net sales for logistics, compared to international standards of around 3-4%. Implementation of the GST and reducing checks at state borders can change all this. This would also benefit the maritime trade and shipping industry on account of reduction in logistics costs.