The future of Indian logistic industry looks bright, thanks to e-commerce penetration, economy revival, proposed GST implementation and government initiatives like Make in India, National Integrated Logistic Policy, 100% FDI in warehouses, food storage facilities, etc. In the Indian logistics industry, transportation enjoys a lion’s share of 60% while warehousing, freight forwarding, value-added logistics, etc. together contribute only 40%. Experts predict India’s GDP growth to be robust. This means that logistics industry will also grow by leaps and bounds as it is directly correlated with economic activity. Considering this fact, the Indian logistic industry is predicted to grow at CAGR of 15-20% between F.Y. 2016 and F.Y. 2020.
This doesn’t mean that logistics industry in India isn’t plagued by any problem. It suffers from many issues like higher logistic costs and complex tax structure. GST Act can become its savior. The implementation of Goods and Service Tax bill is hoped to bring down the logistic costs up to 20% from the current levels, however, development of a robust logistics infrastructure is extremely crucial to bring down persistently high logistics costs. Indian logistics industry is identified by 4 major parts which are transportation, warehousing, freight forwarding and value-added logistics. Transportation which has the major share in the industry comprises of means like road, rail, air and water. However, India being an emerging economy, is heavily dependent on transportation through rail and road.
India is renowned as a low cost service provider in the world. This has made India an IT hub as several companies outsource their work to cut down their operational costs. However, logistics costs in India are pretty high due to several underlying problems. Complex tax structure and poor customs clearance processes adversely affect international export logistics stratum. Lack of proper infrastructure in terms of efficiency of roadways or railways and adequate IT-enabled tracking and tracing mechanisms to support logistics is another big hurdle. Though issues related to infrastructure may not be directly affected by GST, problem of complex tax structure can be resolved once GST comes into effect.
Another major problem is India’s complex tax structure. Currently, each of India’s 29 states tax goods that move across their borders at various rates. As a result, freight that moves across the country is taxed multiple times.
Goods and service tax is a colligation of multiple taxes levied by both Central (i.e, excise duty, countervailing duty and service tax) and state (Value-added tax, Octroi and entry tax, luxury tax, etc.) governments when an end-user purchases goods or services. It means same level of taxation would be charged on a specific product or service across the entire country irrespective of being manufactured and sold in different states. The planned dual GST model (central GST and state GST) proposes to replace around 29 state and federal taxes and tariffs for a single tax at the point of sale. The current combined Centre and State statutory rate for most goods works out to be 26.5% (CENVAT of 14%, and VAT of 12.5%), whereas post GST implementation the same is expected to reduce to standard rate of about 18-21% which will be levied on most goods and all services.
Currently, each of India’s 29 states taxes goods that move across their borders at different rates apart from that Corporate State Tax of 2% is levied for inter-state goods transfer. Not applicable. Uniform taxation and no varying tax structures would be allowed across states.
Current interstate taxation has resulted in a large number of unorganized players in this industry. Resulting in fragmented industry. With the introduction of GST, there is likely to be major consolidation in the industry. It could see the emergence of major large players who can span the entire logistics chain.
There are several hurdles to trade like entry taxes, local body taxes, OCTROI and other hurdles which keep the trucks idle for 30 to 40% of the time they spend on transport as per industry estimates during their delivery schedule. GST will phase out border check posts which will result in improvement of operational efficiency through quicker and increased number of deliveries along with reduction in logistic cost during the transit. As per World Bank estimation Indian corporates can potentially save up to 30-40% of logistic costs incurred due to stoppages at various tolls and check posts.
The existing interstate taxation system has forced the companies to create and maintain warehouses in each state. Currently, there are around 20-30 warehouses per company, one in every state, in addition to this 20-30 Carry & Forwarding agents per state making the supply chain longer and inefficient. GST tax will be levied on transportation of goods and full credit will be available on interstate transactions. Logistic costs are expected to be decreased as a result of warehouse optimisations leading to lower inventory costs which are set up across states to avoid paying 2% corporate sales tax and phasing out of interstate sales tax. There is immense scope for optimization of costs.
The rollout of GST, in India would dissolve the existing indirect tax structure, ie, multiple taxes that is being split between center and state governments leading to reduction of about 20% of current logistic costs. This can in turn put the industry on a high growth trajectory.