As
the Indian transportation and logistics industry looks forward to the next
level of growth, efficiency and sophistication, it gradually leaves behind the
traditional issues pivoted around inefficiencies and regulatory challenges.
It is
in this context, that regulatory reforms proposed in the form of Goods and
Services Tax (GST) are much needed now than perhaps ever before.
PREFACE:
With a potential to
additionally contribute over one percent1 to India’s Gross Domestic Product
(GDP), the proposed Goods and Services Tax is eagerly being looked forward to.
Not only will this reform usher in perhaps a never-seen-before opportunity to
revisit, rationalize and re-engineer transportation and logistics networks in
India, but will also unleash a new era of developing logistics infrastructure
and taking investments to the next level. Given that the inefficient shape of
longer supply chains with warehouses in almost every state is fiscally
preferred in the existing regime, it is now time to overhaul and compress the
entire logistics setup.
Further, the
international experiences of GST, which over 140 countries have introduced in
some or the other variants, the delay in implementation in the Indian context
seems to become all the more a cause of concern. The below framework summarizes
the milestones in the evolution of GST, since the time it was proposed by the
Union Government in 2006-07.
In the Year 2000
Vajpayee Government
started discussion on GST by setting up an empowered committee. The committee
was headed by Asim Dasgupta.
In the Union Budget 2006-07
The Union Budget for the first time announced
that Levy of Taxes on Goods & Services will be at National Level rather
than State level at present.
(Deadline to implement GST was April 01, 2010)
In the year 2007-08
The Empowered
Committee of State Finance Ministers (ECSFM) agreed to prepare a roadmap to
Introduce GST on National Level (since revenue of states are concerned, it was
necessary to prepare committee consisting of
finance ministers of all states)
On November 10, 2009
Change in
business strategies for logistics and warehousing service providers
Currently, the decision to base inventory and
distribution models are based on levy of Central Sales Tax and varied state-Value
Added Tax (VAT) rates and provisions. Tax optimization and administration is
often considered over the operational and logistics efficiency. However, under
the GST regime 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. This will lead to change in
dimensions for logistics requirements of the clients forcing logistics service
providers to rethink their business operations including creating new
warehousing and logistics locations and expanding /closing existing warehouses
at certain locations. In fact, networks and infrastructure associated with
warehousing and logistics hubs are expected to be most impacted in the entire
supply chain. Network and infrastructure related businesses would get
drastically realigned, ensuring proximity to manufacturing locations or
consumption markets and ultimately resulting into several hub-and-spoke models.
From the infrastructure perspective, the scenario
would consist of lesser number of warehouses but with larger sizes, amounting
to consolidation of widely spread warehouses almost one in each state. This
would translate into expansion of some of the existing warehouses, development
of new ones and indeed shutting down of several existing setups. In addition,
locations of strategic significance for warehousing and logistics networks
would eventually also turn out to be critical transportation hubs. Such impacts
would command fulfillment of certain pre-requisites pivoted around
infrastructure including land availability, road/rail/multimodal connectivity,
power, etc. This would in turn require all stakeholders –Logistics Service
Providers (LSPs), end users, industry associations and the government – to plan
in advance so that foreseeable issues could be addressed in time and would help
evolve a more agile, efficient, flexible and futuristic supply chain. LSPs and
their end users both would need to re-engineer their supply chains, focusing on
optimal locations for warehouses and logistics centres. Some of the target
regions would include Chennai-Bangalore belt in the
South, Nagpur region in the Central part and
Mumbai-Gujarat-Rajasthan-National Capital Region (NCR) corridor in the
North-West, driven by the high potential for upcoming manufacturing activities
and the planned Delhi-Mumbai Industrial Corridor (DMIC).
Impact on Cash Planning
Currently,
abatements are available to transport service providers under the Service Tax
law. These are not likely to continue in the GST regime. Also, the liability to
pay tax may shift from the recipient of service to provider of transport
service requiring it to pay full taxes on accrual basis. On account of this, a
major impact will be seen on the cash flow for transport service providers who
generally operate on marginal profit basis. Businesses need to quantify the
cash impact and realign their working capital strategies to reduce / mitigate
the cash flow impact.
Place of Supply, Tax Administration and Input Tax
Credits
The
most important change will be the transition from the present central tax regime
(service tax) to the dual GST regime requiring payment of taxes simultaneously
to the Centre and States and compliances across the country.
The
Place of Supply rules will govern the State where the tax will be payable on
any transaction of Transportation & Logistics. In the case of warehousing,
the Place of Supply can be defined as the place where the warehouse is
situated.
On
the other hand, for transportation contracts, taxes may be levied by each State
through which the goods move, perhaps based on the distance traversed in each
State or alternatively in the State from where the journey of transport
commences. The latter that is, the State from where the journey of transport
commences, would be an ideal basis for taxation. Though being a simplistic
model, the same would pose challenges to the transportation service providers
such as registration and compliances requirements across all the locations from
where the goods are loaded and dispatched. Also, another challenge envisaged is
the ability of the transportation service providers to capture credits in
respect of the expenses incurred enroute. Transportation service providers may incur
expenses in different States during the journey from one location to another
and it will be essential to avail input tax credits on such costs. In the event,
appropriate rules are not framed under the GST law for claim of these credits,
the transportation sector will have to be ready to absorb the impact on account
of these tax costs.
Conclusions
As
India prepares for a transition to the next level of logistics growth
trajectory, regulatory policies need to evolve well ahead of the introduction.
Further, on account of the delay in implementation of GST, it is critical to
gauge the advantages the industry at large and the various stakeholders specifically
are currently losing out. It is in this context that this paper analyzes the
key fiscal as well as business implications of the proposed GST. The below
table summarizes the key business implications that may accrue to the wider
industry owing to increased organization in post-GST scenario.
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