Impact of GST on Logistics Sector in India

Logistics sector in India is highly fragmented and yet to progress as a major contributor of an efficient supply chain. This sector has been primary bottleneck in driving the economic growth due to multiple taxes charged by authorities at interstate checkpoints and various toll booths throughout the country. The truck drivers in India clock an average of 250-280 km per day. Much below the world average of 400 km per day and far below the 700 km  which is  the average  distance covered by a truck driver in the USA every day. This is mainly due to archaic laws and multi-layered tax systems rather than bad roads or inefficiency of the driver. As road transportation accounts for 60% of the freight traffic in the country, the slow movement of goods across states leads to productivity loss. Multiple tax system also results in high logistics cost putting the extra cost burden on the consumers. World Bank estimation states that Indian corporations can save up to 30-40% logistics cost incurring due to stoppages at various tolls and check posts.

The prevailing tax structure in the country is quite complex comprising of central imposed taxes in the form of customs duty, CST, excise duty and then there are varying state imposed tariffs in the form of octroi, entertainment tax, and VAT. Implementation of GST will integrate this multi-layered tax system into a single unified one improving the ease of moving goods between different states by reducing transportation cycle times, minimizing cost, enhancing supply chain innovations, strengthening export-import, less bureaucratic impediments & paper works, consolidation of warehouses etc. enabling logistics sector to reach its potential in terms of service and growth. This would enable logistic service providers to deliver goods more efficiently and optimize delivery times as compared to the present, leading to a reduction in delivery expenses by 12-15 % thereby lowering the final price of the goods. Fall in price of domestic goods will increase the competitiveness of Indian goods and services in the international market. Unethical practices by business enterprises and logistic providers in order to evade tax will also decline once the GST is rolled out. The focus of the business organizations would shift from tax saving to efficiency. The logistics market in the country which is currently dominated by several unorganized service providers will witness the emergence of organized service providers as multiple taxes will no longer be added costs for businesses. Logistics service providers would also invest in adopting sophisticated technologies and training manpower in order to increase efficiency.

There will be a progress in third-party logistics outsourcing due to input tax-credit mechanism. Inter-state trades will become tax-neutral enabling the country to become a single marketplace without state borders. GST rollout will also enable business organizations to establish large warehouses in key strategic locations and few regional distribution hubs (hub & spoke model). Decrease in tax burden and buffer stock will reduce the need for widespread warehouses at several locations.  With GST roll out, these smaller warehouses will amalgamate to form large efficient warehouses with state-of-the-art infrastructure, planning and well-trained manpower which are not feasible in scattered warehouses.

Uniform tax regime will play a crucial role in next level of growth enabling the country to realize its potential as a global trading hub. Progress in overall logistics sector from the perspective of trade would be pivotal in determining the success of ‘Make in India’ campaign launched by Government of India.

Thus, GST will unleash a new era for logistics sector in the country as the regulatory reforms proposed in the GST bill creates an opportunity to re-engineer logistics, transportation networks and design innovative supply chain models for reducing cost and increasing efficiency. However, for now, GST remains to be a mirage.

--------

Ashwathej Purushothaman is from Kochi and is currently studying at Jindal Global Business School, Delhi.