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.
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.
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.