In the Indian logistics industry, transportation contributes to 60% of the services and the balance is contributed by warehousing and allied services.
The regulatory reforms proposed under GST offer a golden opportunity to rationalize transportation and logistics networks, given the inherent inefficiencies in State border checkpost taxes.
The prevailing complicated tax structure in India meant that logistics decisions, including the choice of setting up inventory and distribution centres, are taken based on the current tax regime rather than on operational efficiency.
The existing tax regime has almost forced the industry to set up the inefficient and longer supply chains with warehouses in almost every State, even though this beats fiscal prudence. To take full advantage of the GST regime, the logistics industry now needs to overhaul and compress the entire logistics set-up.
GST, when implemented, will infuse this much-needed fiscal wisdom into decisions on transportation, warehousing and distribution; and free it from mere tax considerations. Experts believe that henceforth, the industry will be able to create its infrastructure solely based upon operational and logistics efficiency. This will lead to changes in logistics requirements of clients, forcing logistics service providers (LSPs) to rethink their business operations, including creating new warehousing and logistics locations and expanding or closing existing warehouses at certain other locations.
In fact, networks and infrastructure associated with warehousing and logistics hubs are expected to be the most affected in the entire supply chain when GST takes effect. Network and infrastructure-related businesses would get realigned, ensuring proximity to manufacturing locations or consumption centres and ultimately resulting in hub-and-spoke models.
From the infrastructure perspective, the new scenario would reduce the number of warehouses but will increase their sizes. This will result in a consolidation of the currently widely spread warehouses across States. Industry observers expect to see expansion of some of the existing warehouses, development of new ones and shutting down of several existing set-ups. LSPs and their end-users both would need to re-engineer their supply chains, focusing on optimal locations for warehouses and logistics centres.
All this means that the industry will have to upgrade its information technology systems to fall in line with the GST framework. Many IT giants, especially in the ERP space have already ramped up their IT solutions to fit the GST regime. The immediate task is to leverage technology to support compliance and smooth transitioning from the current to new GST regime. This includes taking the following steps urgently:
Since supply chain is at the heart of logistics, it is imperative to assess GST’s impact on supply chain network & processes. Developing a new supply chain operating model to suit the GST regime should be undertaken urgently. The following steps need quick action.
All the above changes need a shift in the accounting and reporting backbone for smoother operational compliance. In this area, the objective would be to design and document ‘To-Be’ processes incorporating GST implications, accounting changes and key control activities.
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