Sep’16

Impact of GST on
Logistics Sector
Model Law GST Series

GSTpanacea.com Consultancy Private Limited

NEW DELHI
IMPACT OF GST ON LOGISTICS SECTOR

Introduction ...................................................................................................................................................................2
Warehousing ..............................................................................................................................................................4
Introduction ...........................................................................................................................................................4
Impact Of GST ........................................................................................................................................................5
Transportation............................................................................................................................................................8
Introduction ...........................................................................................................................................................8
Impact of GST on Transportation includes: ...........................................................................................................9
Supply Change management .......................................................................................................................................11
Introduction .............................................................................................................................................................11
Impact of GST ..........................................................................................................................................................12
Comparison Between Pre Implementation and Post Implementation of GST .............................................................14
Conclusion of Impacts on GST on Logistics Sector ....................................................................................................16
Key Beneficiaries ........................................................................................................................................................17
Disclaimer ....................................................................................................................................................................17

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 IMPACT OF GST ON LOGISTIC SECTOR

INTRODUCTION

Logistics is generally the detailed organization and implementation of a complex operation.

In a general business sense, logistics is the management of the flow of things between the
point of origin and the point of consumption in order to meet requirements of customers or
corporations. The resources managed in logistics can include physical items such as food,
materials, animals, equipment, and liquids; as well as abstract items, such as time and
information. The logistics of physical items usually involves the integration of information
flow, material handling, production, packaging, inventory, transportation, warehousing,
and often security.

Logistic sector act as backbone for some key sectors like retail, automobiles
pharmaceuticals etc. The logistic sector in present contributes to about 14 % in the Indian
GDP. Logistics companies in India have evolved over the years from being mere first-party
logistics providers (1PL) to second-party logistics providers (2PL) to integrated fourth-
party logistics providers (4PL) by providing a complete package of logistics services,
including transportation, warehousing, pool distribution, management consulting, logistics
optimization, etc. and complementing them with advanced supply chain facilities.

Despite being a lower cost service providing country, India has higher logistics cost due to
various issues and challenges faced by the industry. Apart from being entangled in complex
tax structure, the industry is also affected by poor rate of customs efficiency of clearance

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processes and procedures thus affecting the international export logistics stratum.
Furthermore, sub-optimal comfort provided by the existing Indian infrastructure combined
with lack of implementation of efficient IT-enabled tracking and tracing mechanisms has
adversely affected the performance of logistics. The current article delineates upon the
complex tax structure issue faced by the logistic industry and the benefits that this industry
would derive upon implementation of GST, thus providing respite to certain extent to the
industry.

Introduction of GST will be a boon for the Indian Logistic Sector as it will cut down cost
in both logistics and warehousing sectors. Levitation of taxes at a national level instead of
individual states will cut down on logistics cost and increase cross border transportation.

Indian Logistics sector

Value added logistics
5%
Freight forwarding
10%

Warehousing
Transportation
25%
60%

Transportation Warehousing Freight forwarding Value added logistics

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WAREHOUSING

Introduction

A warehouse is a commercial building for storage of goods. Warehouses are used

by manufacturers, importers, exporters, wholesalers, transport, businesses, customs, etc.
They are usually large plain buildings in industrial areas of cities, towns and villages.

They usually have loading docks to load and unload goods from trucks. Sometimes
warehouses are designed for the loading and unloading of goods directly
from railways, airports, or seaports. They often have cranes and forklifts for moving
goods, which are usually placed on ISO standard pallets loaded into pallet racks. Stored
goods can include any raw materials, packing materials, spare parts, components, or
finished goods associated with agriculture, manufacturing and production. In Indian
English a warehouse may be referred to as a godown.

The warehouse industry in India is estimated to be at INR 560 billion and is growing to be
at 10 percent every year[1].The growth in Indian warehouse industry is primarily driven
by growing manufacturing activity, rise in domestic consumption, increasing international
trade, growing organised retail in the country and increasing private and foreign
investments in infrastructure.

Apart from traditional storing services, warehouses now provide additional services such
as merging and breaking up of cargo, packaging, classifying, bar coding, reverse logistics,
etc adding value to the customers.

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The different types of warehousing segments in India with their major players in
the industry are:

 Industry/Retail warehousing- DHL, Safexpress, MJ Logistics, Allcargo, etc.

 Liquid storage- IMC Ltd, Vopak India, Indian Oil Tanking, Sealord, etc.
 Agri warehousing- National Bulk Handling Corporation Ltd., Adani Agri Logistics,
Ruchi Infrastructure Ltd, etc.
 Cold stores- Snowman, Cold Star, ColdEx, MJ Logistics, Fresh and Healthy Enterprise,
etc.

Impact Of GST

Besides the tax implications, complex state-wise tax structures have serious repercussions
on the manufacturers. Inventory and distribution decisions are based on tax avoidance
rather than operational efficiency. Accordingly, most manufacturers maintain warehouses
in different states to evidence movement of goods from one warehouse to another to save
on the CST. Also, quite a few entities set up warehouses in locations like Pondicherry or
Daman, often impractical from a distribution point of view, as the CST rate at such
locations were previously lower than the rates prevalent in other states.

With the introduction of Goods and Services Tax, many taxation procedures will come
down, nearly halving the cost of inventory as customers will not need to pile up stocks in
different warehouses.

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 Consolidation of
Warehouses
Impact of GST on
Warehousing

Reduction of Trade Barriers

Revaluation of Sourcing &

Manufacturing Decision

Easy Tax Compliances

OPTIMAL WAREHOUSING STRUCTURE

 Reduction of multiple warehouses - This will lead to Expansion of existing

Warehouse, Creation of New ones and Shutting down the various warehouse.
 Reduction of Administration cost
 Better Controlling

IMPROVED EFFICIENCIES DUE TO REDUCTION OF TRADE BARRIERS

 Reduced Transaction Time (save fuel, fasten delivery)- The transportation

time and the overall cost will be reduced as the goods will be transferred from
one state to another by easily surpassing various octroi and check points.

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  Supply of Goods – Hustle free due to streamlining of paperwork,
avoiding freight delays and stoppages and boosting operational efficiencies.

 The warehouse/logistics costs across the operational and non-operational

segments will be curtailed. This will improve the operational profitability by
almost 300-400 bps

 IT cost will be saved due to ERP deployed in many warehouse.

RE-EVALUATION OF SOURCING & MANUFACTURING DECISION

 Working Capital Requirements

 Distribution Setup & Territory Allocation- Rerouting of warehouses to

Delhi, Mumbai, Chennai, Kolkata as Delhi Warehouse can serve the north
India, Mumbai Warehouse can serve the West India, Chennai Warehouse can
serve the South India and Kolkata Warehouse can serve the East India.

TAX COMPLIANCE WILL BECOME EASIER OR SIMPLER

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TRANSPORTATION

INTRODUCTION

The regulatory reforms proposed in the GST presents a golden opportunity to revisit,
rationalize and re-engineer transportation and logistics networks, given the inherent
inefficiencies with taxes based on the crossing of administrative boundaries or border
checkpoints. Taxation at a national level, rather than by each state, will result in more
efficient cross-state transportation, streamlining paperwork for road transporters and
bringing down logistics costs.

GST, combined with the dismantling of inter-state check posts, is the most crucial reform
since the economic liberalization in 1991 that can significantly improve domestic and
global competitiveness of Indian manufacturing firms.

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 Impact of GST

1. Availement of Cenvat Credit of all input

and capital goods
Transportation
2. Transportation become faster
3. Requirement of New Automobiles
4. Low cost of Fuel

IMPACT OF GST ON TRANSPORTATION INCLUDES:

CENVAT CREDIT OF INPUT

IN PRESENT SCENARIO

The transport sector has to bear a number of taxes for running the vehicles and for
carrying goods by road. In addition, fuel, spares, etc., are the main running expenses.
While credit of excise duty paid on excisable inputs can be availed for payment of
service tax, practically it is not possible for the transport sector to avail of such
credit. Further, no set-off is available towards other taxes borne by the transporters.
The truck owners/operators are not liable for the payment of Service Tax and cannot
avail Cenvat credit on inputs and capital goods. In this regard the Committee

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 recommends that whosoever is liable to pay Service Tax on transport of goods by
road should be allowed abatement towards items such as fuel, spare parts, toll tax,
local taxes, etc. Taking into account all the cost elements and the abatements given
to sectors providing similar services, the Committee recommends an abatement of
75% on the gross freight amount charged. The abatement would, however, be
subject to condition of non-availment of Cenvat credit on input goods and capital
goods, and non-availment of exemption to goods sold during the course of
provisions of service, etc. The credit of taxable services would, however, be
available to the assessee claiming such abatement.

IN GST REGIME

Cenvat credit of all input and capital goods are allowed. Therefore, abatement of
75% may be not there in GST.

It may be possible that reverse charge mechanism will not be there in GST and tax
burden shift to service provider to service recipient which will require extra working
capital as tax paid on accrual basis.

1. Transportation now will be costly as GST is being raised to 18 percent from present
tax of 15 percent. Since GST is an indirect tax, ultimately tax burden will be passed
by the industry to consumers and hence its impact will be shifted. Here due to higher
cost to consumer, a little impact on this industry may be seen during transition
period and will stabilize thereafter.

2. Currently Petroleum & allied products are kept out of GST so there would be no
impact to take credit of Petroleum by Industry. But there are certain sections which
are demanding inclusion of these in GST & GST Chain. If they are added in GST
chain then definitely it would be huge benefit as Petroleum Products have much

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 larger impact on economy than thought. Such Low Cost of Fuel, if happens, would
give advantage to economy and reduction in overall price of each and every
commodity thus cooling of inflation might be to a great magnitude.

[Author’s view: Even if Petroleum & its products are included in GST Regime then also they
would be out of GST Chain and thus it is next to impossible to quantify the impact at this moment
as things are not clear.]

3. Due to reduction of warehouse lot size of inventory will increase & require bigger
trucks/vehicles for supply.

4. Benefit on purchase of vehicles as automobiles may be cheaper due to lower GST

tax.

SUPPLY CHANGE MANAGEMENT

Introduction

SCM can provide a distinctive and sustainable competitive advantage and improved
profitability on the four dimensions of competitiveness—cost, quality, response time, and
flexibility. SCM “encompasses the planning and management of all activities in sourcing
and procurement, conversion, and all logistics management activities. Importantly, it also
includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third-party service providers and customers. In essence, SCM integrates
supply and demand management within and across companies.”

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'The supply chain process plays a critical role in determining the level of profitability on a
company. The more efficient and productive the supply chain process is, the greater the
profitability of the company. Conversely, the less efficient and less productive, the higher
the supply chain costs and lower the profitability. Supply chain management (SCM) has
the potential to improve the three key drivers of financial performance — growth,
profitability, and capital utilization.

Impact of GST

In India Indirect Taxes have driven businesses to re-structure and model their supply chain
systems owing to multiplicity of taxes and costs involved. India is at the cusp of moving to
the GST regime, which is being seen as one of the biggest business reform as against tax
reform.

The cascading effect of local taxes and complex regulatory structure of central and state
bodies have added to the inefficiencies for businesses. The proposed GST predict well for
businesses through simplified processes. This can create competitive advantage for those
who move early.

Under the new GST regime, the ‘appropriate state’ for payment of GST on supply of goods
and services shall be governed by ‘Place of Supply Rules’. The impact for these rules is
likely to be most acute for service providers, wherein the place of supply is based on
location of service recipients for B2C supplies (such as mobile operators, banking, travel
etc.). Companies currently discharging tax dues on a centralized basis would, under GST,
need to have state-wise establishment, registration and undertake compliance.

Goods and Services Tax would be levied and collected at each stage of sale or purchase of
goods or services based on the input tax credit method. This method allows GST-registered
businesses to claim tax credit to the value of GST they paid on purchase of goods or
services as part of their normal commercial activity. Taxable goods and services are not

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distinguished from one another and are taxed at a single rate in a supply chain till the goods
or services reach the consumer. Administrative responsibility would generally rest with a
single authority to levy tax on goods and services.

GST offers a great opportunity to revisit your Supply Chain & Distribution strategy, and
identify what is required to become GST ready. The tax will be levied on stock transfers
and full credit will be available on inter-state transactions. This will free the decisions on
warehousing and distribution from tax considerations and decisions will be based purely
upon operational and logistics efficiency. the supply chain process plays a critical role in
determining the level of profitability on a company. The more efficient and productive the
supply chain process is, the greater the profitability of the company.

Supply chain design will be based on demand management and logistical benefits
rather than tax costs.

1. Suppliers
 Remodel cost of supplies with revised credit and tax fact-based negotiation with
suppliers
 Remodel supply flows: – i.e. Intrastate or interstate
 Drive compliance to improve costs

2. Manufacturing
 Reconsider contract manufacturing strategy
 Evaluate number of contract manufacturing locations
 Remodel product flow paths – Factory—hub— Clearing and Forwarding Agent
(CFA) combinations.

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3. Logistics & distribution
 Remodel mix of direct supplies
 Revisit network setup to consolidate warehouses – Evaluate need for factory
warehouse, third-party logistics (3PLs) – Phased reduction of CFAs
 Evaluate distributor setup and territory allocations

4. Planning
 Devise supply rules and priority for stock allocation in an ‘open’ environment
 Remodel base planning metrics
 Reconsider Inventory norms – Lead time – Safety stock – Variable distribution
costs – Service levels
 Plan for order management and handling

5. Impact of effective SCM on a firm’s cash flow

6. Financial Impact- Return on Capital (ROC) will increase due to

 Labour cost will decrease
 Optimum Utilization of Resources

7. Improve Inventory Management due to less IDLE Time

8. Competitive Edge The big giants who can invest with their backed-up funding will give
tough competition to the players who are at the entry and/or mid-level in the market.

COMPARISON BETWEEN PRE IMPLEMENTATION AND POST

IMPLEMENTATION OF GST

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S.No. Basis of Pre Implementation Post Implementation
Difference
1 No. of warehouse Large number of Few Warehouses
warehouse at current.
2 Administration Huge Administration Administration cost reduced
Cost cost due to large no. of drastically with the introduction
warehouse. of GST
3 Controlling Controlling with the Better controlling
multiple warehouses
become difficult
4 Transaction Time At present transaction The transportation time will be
take time due to octroi at reduced upto 60% due to
every state, lots of streamlining of paper work and
paperwork. surpassing octroi.
5 Distribution of The present inter-state Rerouting of warehouses to
warehouses system of transport Delhi, Mumbai, Chennai,
taxation has compelled Kolkata.
organizations to put up
warehouses in every
state.
6 Working Capital Currently the tax is paid Under GST the working capital
requirements by Recipient of Service. requirement will increase as the
GST is applicable at the source.
7 Cenvat Credit At present transporters Cenvat credit on input and
cannot avail Cenvat capital goods are allowed.
credit on inputs and
capital goods

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 8 Tax Present Tax on Proposed tax is 18%.
transportation is 15 %.

Conclusion of Impacts on GST on Logistics Sector

The GST reform foster the market across the country and reduce compliance costs. GST
has various impacts on the logistics sector which are as follows:

 Warehouses: There will be less warehouse as compared to the present situation

under GST reform as because all the small warehouses will be merged into single
large warehouse as the GST is based on the centralized approach. Better
management or controlling due to less warehouse.
 Administration Cost: Lower administration cost due to reduction of warehouses.
 Inventory Costs: It will reduce the inventory costs as presently CENVAT is included
in the inventory costs which in case of GST is fully recoverable immediately as
input tax credit reducing the inventory costs.

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  Credit: In GST manufacturers are entitled to input tax credit on all inputs and capital
goods whether local or interstate purchases. This will the cost in the business.
 Working Capital requirement: Under GST the working capital requirement will
increase as the GST is applicable at the source. Hence GST is payable at the initial
stage but the same is allowable as credit further.

KEY BENEFICIARIES

VRL Logistics, GATI, Blue Dart, Transport Corporation of India, Snowman

Logistics

DISCLAIMER

Article is issued for information purpose. Not to be considered as professional advice.

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