Impact of GST on Logistics and Warehousing Sectors

A transport system is the lifeline for an economy. Manufacturing and retail sectors highly depend on it.

From a click to your doorstep…well, it takes more than that.

From the point of origin to the point of consumption the flow of goods is managed by the logistic sector which comprises of transportation, warehousing, and some other services.

The dependency on transportation alone is above 70% out of which road transport takes 60%of the load. At an average speed of 20-40 KmpH driving 300-400 Kms per day around half a crore truck drivers hold the job of supporting this system. But wait, are these numbers good? In America and other developed countries, the same compares to almost 85 KmpH and 700-800 Kms per day. Undoubtedly, "America runs on wheels".

A transport system is the lifeline for an economy. Manufacturing and retail sectors highly depend on it. For a developing country like ours, economic growth is directly proportional to the rate at which flow of goods takes place. But the factors that we will discuss below obstruct that flow.

There are two kinds of hurdles that a truck driver faces:

  • Firstly, administrative delays which are caused by procedural formalities by the various State borders check posts. Trucks have to stop multiple times for filling forms, have their documents checked, physical checking of their vehicles (often 4-5 times) and consignments by RTOs and traffic police as well as to pay highway tolls and taxes (as reported by The Indian Warehousing Industry: An Overview, October 2013 – EY and CII Report). These formalities take hours and to top that they are not allowed entering into the cities before 10.p.m. Thus, if any unprecedented delays take place due to the formalities mentioned above, they have to wait for hours to get the next regulatory clearance.
  • Secondly, non-administrative delays consist of breakdowns, criminal activities on the highways, etc. It's a totally different story, and we won’t discuss it in this article.

Why are these formalities imposed?

Traditionally, check posts were just for monitoring the movement of goods and preventing smuggling and illegitimacies. But, as the need arose, it transformed its purposes to supporting the State and Central governments by collecting revenue, through VAT, CST and ET, too.

While moving goods across the State borders, the goods carriers encounter various formalities and taxes which are not same in all 29 States. There are various taxes which are not centralised as they are taxes imposed by the State. These cause lack of procedural clarity and levy of taxes multiple times. These all add up to unnecessary delays and logistic costs, which decreases customer satisfaction and wastage of goods like perishables, among other things and making India’s logistic sector expensive, even though India is a country known for its low-cost services.

What do the traders and manufacturers do to avoid these costs?

They place multiple warehouses within a particular State to keep their inventories filled up to avoid the flow of goods multiple times across borders. But this causes strategic disadvantages, increases the cost of warehousing and decreases capital input per warehouse and thus, lacks technology integration. These end up making the logistic companies highly inefficient.

There are other problems such as, lack of exchange of information between the parties which incidentally leaves the parties unprepared for the deliveries. It has caused domination of unorganized players over these warehouses because of its highly scattered placement. But as the industry is growing rapidly led by e-commerce, initiatives like "Make in India," 100% FDI on warehouses, national integrated logistic policy, etc. organized players are rapidly surfacing the sector. These players don't tolerate such obsolete ways of business and are very quick in adopting modern technology and management systems to maintain speed and accuracy at which they deliver goods to their customers.

But, still these are not enough for the industry as there remain other external problems such as lack technology implementation in tax monitoring system and lack of a unified tax structure. Leaving the technology implementation away, for now, I would like to talk about how a unified tax structure can help the sector in minimising its problems.

Yes, GST: Good and Service Tax will dissolve the existing indirect tax structure (by the State governments and Central government such as VAT, CST and ET).

  • It will be applicable at the place of supply, thus, will phase out the burden of cost and delays at the check posts. The deliveries will be quicker and will be increased in number. This will help “make India great again”.
  • The lack of procedural clarity and multiple-taxation will be knocked off because of the unification of taxation.
  • Due to the easement of cross-border transport, the warehouses could be placed more strategically (closer to manufacturing/import/export locations, etc.). There won’t be the need for multiple warehouses (in a State) as larger warehouses will be strategically placed. It will decrease the cost of inventory and increase control over them.

It will create a favourable environment for organized players and thus, improve efficiency.

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