Mahindra Logistics

GST opportunities & challenges

The proposed goods and services tax (GST) is expected to help companies reduce logistics costs by 1.5 to 2.5% as they reconfigure their supply chains and bring in three key structural changes to the logistics industry. First, as India becomes one big market, there will be fewer and larger warehouses. Second, it will lead to a larger number of bigger trucks on road as there is greater adoption of the hub-and- spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations.

Experts believe that GST implementation would bring about noteworthy improvements in ease of doing business and in supply chain efficiencies of various industries. Since the logistics industry is a facilitator, it will witness considerable opportunities for growth. However, it is also expected to face challenges in reworking its business model to align itself with the evolving procurement and distribution strategies of the end-user industries. Warehousing and contract logistics companies would make sizeable investments towards setting up large and technology-enables warehouses at strategic zonal centers.

Impact on profitability

This is expected to impact the near-term profitability of these companies; but the same shall be positive over the longer term. At the same time, the industry is expecting more clarity about the applicable GST rate on the logistics industry, the continuation of reverse charge mechanism for a Goods Transport Agency, the allowable input credits and the timelines for implementation. As a result, the quantum of improvement in profitability and the extent of investments that could go into the logistics industry remain uncertain.

This can result in exports becoming more competitive as the GST regime will eliminate the cascading impact of taxes. A National Council of Applied Economic Research study suggests that GST could boost India's GPP growth by 0.9-1.7 per cent. Since GST is expected to create a unified market across India, it can facilitate seamless movement of goods across States and reduce the transaction cost of businesses. According to an informed estimate, truck drivers in India spend 60 per cent of their time off roads negotiating check posts and toll plazas; while the road transport sector grapples with 11 categories of taxes. Different tax barriers, such as check posts and toll plazas, also lead to wastage of in-transit perishable items. This penalty transforms into major costs due to higher needs of buffer stock, warehousing costs including cold storage chains. A single taxation system will eliminate this roadblock and GST will thus not only help bring down logistical costs but will also make transport of perishable goods more profitable.

Better compliance

Due to the trail left by GST, if the supplier evades taxes, it could be detected during the client audit and features like this will help improve tax compliance. The ‘GST-ization’ of the Indian taxation system will also reduce the number of excise duty exemptions which contribute to India losing about 2.7 per cent of GDP because of current tax exemptions. This will be a gain for the economy since the government will have more funds at their disposal. GST will provide credit for the taxes paid by producers in the goods or services chain. This is expected to encourage producers to buy raw material from different registered dealers and is hoped to bring in more vendors and suppliers under the purview of taxation. The GST regime is also expected to see the removal of custom duties applicable on exports and in the process, lower costs of transaction. This will contribute to India’s competitiveness in the foreign markets.

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