GST is expected to Transform and prove to be a boost for over $130 billion Logistic Industry.
“The logistics space in India is expected to grow at a rate of 9-10 percent over the medium-term” according to rating agency ICRA.
While the key driving factor on the demand side would be the economic recovery, the trend towards outsourcing of non-core activities like logistics, warehousing and associated activities to integrated players is likely to drive the share of the organized segment, it said.
The domestic sector is currently in a transformation phase with game-changing trends like implementation of GST, increasing focus by foreign investors across the logistics value chain, growing demand for end-to-end solution providers and emergence of new avenues such as e-commerce, logistics parks, cold chains and new startups. Further it said “The government’s thrust towards building multi-modal transportation infrastructure is also likely to have a significant influence,”
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“Logistics is the part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements.”
Source: Council of Supply Chain Management Professionals
Logistics is regarded as the backbone of the economy as it ensures efficient and cost-effective flow of goods and other commercial sectors depend on it. Logistics industry in India is evolving rapidly and is expected to reach over $ 2 billion by 2019. With over seven million goods vehicles moving around the country, the freight volume has reached 1,325 billion ton per km, a figure that is supposed to double by 2025. Indian logistics market is expected to grow at a CAGR of 12.17% by 2020 driven by the growth in the manufacturing, retail, FMCG and e-commerce sectors.
Transport is a crucial function of the logistics industry, accounting for 50-60% of the market size, followed by warehousing and storage, comprising another 25-30% of the total market. The rest of the market constitutes value-added and freight forwarding services. Road transport, with 60% share, dominates the logistics industry, followed by railways 32%, waterways 7%, and air cargo 1%.
To support India’s fast paced economy, growth of logistics industry is very essential. However, the logistics sector still remain one among the primary bottlenecks in driving economic growth, it has potential also to act as a catalyst to realizing India’s manufacturing and e-commerce dream for the coming decade. According to Assocham, India can save up to US$45 billion if logistics costs are brought down to 9% of the country’s GDP, thereby making domestic goods more competitive in global markets. The US spends 9.5% and Germany 8% of their GDP on logistics costs.
The most essential challenge faced by the industry today is lack of proper infrastructure support, warehousing & distribution facilities, insufficient integration of transport networks, poor fleet management, low level of adoption of information technology etc. Regulations exist at a number of different tiers, is imposed by national, regional and local authorities. However, the regulations differ from city to city and state to state, hindering the creation of national networks.
The disorganized nature of the logistics sector in India, coupled with many other practical level deficiencies like lack of integrated multi-modal nodal facility centers & poor facility management, lack of IT standard, equipment and poor systems integration, insufficient availability of trained manpower, training institutes etc.
Poor facilities and fleet management, capacity crunch especially for specialized equipment or carriers with modern handling facilities are the reason for high levels of loss, damage and deterioration of stock, mainly in the perishables sector. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is also partly down to lack of training. There exist several such challenges and also opportunities for logistics sector in the Indian growing economy.
The World Bank reports trucks in India cover 250-300 km per day against the average 800 km and 450 km in the USA and Brazil respectively. Approximately 60% of travel time is lost due to unorganized paperwork and tax compliance procedures at interstate checkpoints, forcing logistics costs to hover at two to three times more than the international benchmark. India’s logistics costs stand at almost 14% of the total value of the shipment, as opposed to the international benchmark of 6-8%.
GST Could be a Game Changer in Logistics Industry
The rollout of GST is expected to integrate India’s multi-layered indirect tax system into a single unified one, unshackling India’s fragmented geographic state boundaries. These changes could reduce transportation cycle times mostly by eliminating the time spent at check posts for administering local taxes; enhance supply chain decisions; lead to consolidation of warehouses, encourage organized sector to dominate by reducing the competitive edge enjoyed by the unorganized logistics players due to tax avoidance / evasions etc. which could help the logistics industry reach its potential in terms of matching high-quality service levels and growth.
Particularly for the logistics sector, GST is expected to usher in some positive changes through simplification and standardization of procedures, warehouse re-engineering due to seamless availability of input tax credits, reduction in costs due to transition to an IT-focused system of compliances, and possibly easier and more efficient transportation of goods between borders. GST also enables to have greater flexibility and efficiency in logistics operations as GST removing distortions created by differential taxes and duty structures imposed across India’s 29 states and 7 union territories. In GST there’s no tax beneficial tax arbitrage to be gained. So decisions on manufacturing, warehousing and selling will be purely driven by the real costs of manufacturing and going to market – purely a operational & logistic strategic decisions. So the focus now shifted from tax efficient strategy to logistic efficient approach. Since GST is totally digitalized, it encourages all the businesses are also to align through technology.
In a nutshell GST is not only a tax reform, it is also a business reform as a whole, and a lot of businesses are now restructuring their supply chains
The new tax regime will bring down distribution costs for organized players in the industry. It has eliminated the need for dedicated warehouses for each individual administrative region. Logistics companies, which were earlier forced to set up many small warehouses across multiple cities, can now put up just a few, big warehouses region-wise and can follow the hub-and spoke model for freight movement from the warehouses to the different manufacturing plants, wholesale outlets, retail outlets and the various point of sales.
State Wise Warehousing – No More Required
Earlier manufacturers would typically have warehouses in different states across the country to avoid Central Sales Tax (CST) and prolonged on-road transit time. Furthermore, corruption at state borders and the influence of local booking agents would force the logistics sector toward fragmented behavior. The introduction of an integrated GST and the prospect of easier delivery of goods has encouraged companies to consolidate their warehouses in select strategic locations with the intention of centralizing their dispatch operations and capitalizing on the renewed commercial road transport opportunities.
With the consequent physical network realignment which may built on a hub and spoke model in the post-GST scenario, many companies are moving with this model, ensuring proximity to manufacturing locations or consumption centers resulting larger regional consolidation centers at key strategic locations with larger warehousing facilities resulting in Inventory Centralization and Cost Reductions.
The current transportation fleet in the nation is dominated by less efficient nine and twelve tons vehicles which needs to replace with high capacity fleet to cater to longer distances and higher cost optimization and capacity utilization. The Transport Ministry is working toward the construction of logistics parks across India with the purpose of aggregating freight to build distribution hubs. The emergence of these hubs will bolster long-haul on-road movement of freight on larger trucks, large express distribution network, large format warehouses, international level shipping infrastructure, cold chain, fulfilment services to e-commerce etc. The transport sector expects this transition to a hub-and-spoke model with high capacity trucks to enable direct movement to end locations with lower checkpoints and faster movement of goods to reduce transit time and logistics costs by 20%.
Abolished Check Posts:
As many as 22 states, including Delhi, West Bengal and Maharashtra, have abolished check posts within three days of the implementation of the Goods and Services Tax (GST). This has eliminated the time wasted at state borders by disposing lengthy clearance processes. Seamless transport is expected to cut transport costs, which will help make goods cheaper. In India, goods are largely transported by the most costly mode, roads, and the state boundaries escalated that costs. This move reduced time for movement of goods by 30 per cent. Cutting this delay short can help the economy save around Rs 2,300 crore which used to be lost due to goods trucks waiting at state borders with their cargo.
Simply halving the delays due to roadblocks, tolls and other stoppages could cut freight times by some 20-30% and logistics costs by an even higher 30-40%, according to World Bank estimate. Unlocking the GST Advantage which will integrate India into one common market alone can go a long way in boosting the competitiveness of India’s key manufacturing sectors by 3-4% of net sales.
Infrastructure – Key to Logistic Growth :
Indian logistics sector till very recent time comprises of inbound and outbound segments of the manufacturing and service supply chains. Of late, the logistics infrastructure has gained a lot of attention both from industry as well as policy makers. The role of managing this infrastructure, to effectively compete has been slightly under-emphasized. Inadequate logistics infrastructure has an effect of creating bottlenecks in the growth of an economy
Nearly 61% of the cargo is moved by road In India, and rest by rail, seaways, airway, and pipelines. The railways account for 30 percent of total freight movement in India and are a preferred mode of transportation for long haul and bulky commodities such as coal, iron ore, fertilisers, steel and cement. Additionally, the government’s other major emphasis is on improving India’s transportation mix by developing inland and coastal waterways. At present, seaways account for a minuscule 7 percent of total freight movement in India compared to countries like China (30 percent) and USA (14 percent) that heavily use waterways.
Given the economic and environmental benefits, the government has chalked an ambitious Sagarmala project that aims at doubling the share of seaways in the transport mix over the next decade by executing multiple projects related to expansion and modernization of various ports.
A first of its kind in India, ‘roll-on, roll-off (ro-ro)’ ferry service between Ghogha and Dahej in Gujarat which Prime Minister Narendra Modi inaugurated recently will be able to carry up to 100 vehicles (cars, buses and trucks) and 250 passengers between the two ports. The ro-ro ferry services are vessels made to carry wheeled cargo that are driven on and off the ferry on their own wheels or using a platform vehicle. The wheeled cargo includes, cars, trucks, semi-trailer trucks, trailers, and railroad cars. The service shall reduce the travel time between Ghogha in Saurashtra, and Dahej in South Gujarat, from about seven or eight hours, to just over an hour. The distance between the two places would be reduced to 31 km from the current distance of 360 km. When fully operationalized, it will also enable movement of vehicles. More and more such innovative projects need to come up to boost logistics sector as well as economy.
With an attempt to improve integrated logistics, the government also plans to develop about 35 strategically located multi-modal logistic parks (MMLPs), close to major manufacturing and consumption centres. These initiatives have significant potential to bring down the logistics costs in the country over the medium term. Policy-driven promotion of the Public‒Private Partnership (PPP) model is vital for infrastructure development in the transportation sector, along with plug-and-play projects
The integrated transport and logistics framework aims at increasing the average speed of freight transportation on the highways network from the current speed of 20-25 km per hour to 40-50 km per hour and to reduce the logistics cost by almost half. An overall network of about 56,000 km has been identified including existing national corridors (Golden Quadrilateral and north-south-east-west corridor), proposed economic corridors, inter corridor routes and feeder routes. In addition to this 191 towns and cities have been identified on these routes where steps will be taken to reduce congestion. Inter-state border movement related documentation and procedure will also be simplified. These interventions will enable a reduction of 5%– 6% in the overall supply chain costs in the economy. Logistics parks will help reduce transportation cost for the top 15 nodes by about 10%, besides reducing pollution, congestion and warehousing costs.
The government’s plan will serve to make the economy competitive by reducing logistics costs, bring down pollution levels by reducing congestion on roads, give a boost to industry and create employment. This is the first time ever that the development of the transport sector is being done in such an integrated manner. The plan will serve to make the economy competitive by reducing logistics costs, bring down pollution levels by reducing congestion on roads, give a boost to industry and create employment.
With implementation of GST, organizations face newer challenges such as alignment of accounting and taxation systems with the new processes, they will need to embrace IT into the entire workflow. GST can provide a major fillip and competitive advantage through creation of transparent and totally digitalized business environment as technology is at the heart of GST. Businesses need to have a reasonable IT infrastructure in place in terms of business process reinforcement, tax configuration, input credit setoff, tax impact assessment & accounting, inventory data storage, document numbering, data amendments, impact analysis on interfaces, reversal of open transactions, many other dynamic changes and so on to align with GST.
The proposed e-way bill for moving goods within the country would rely heavily on high technology interface employing RFID chips and QR codes, to ensure that monitoring of goods movement does not bring back inspector raj and slow down goods traffic on highways. The e-way bill in the GST regime will put an additional layer of documentation by way of prior online registration of the consignment for transporting shipments exceeding INR 50,000. The unorganized nature of the logistics sector may make it a challenge and difficulty for small players to adopt to electronic-way bills, however over a period they too become more and more professional and adopt the technology for their own good.
Significantly the impact of GST is revolutionary transformation of economy, trade & business towards complete digitalization. With GST India will move towards an IT- enabled, better, bigger, and Swatch (cleaner) business and economy.
Author : SN Panigrahi, GST Consultant, Practitioner, Corporate Trainer & Author
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