The hula-hoop around GST has been spinning for a while now, just enough to make it a strong contender for news of the year. It is finally here, despite protests from various corners of the polygon that is the Indian business sector, from diamond merchants to fabric traders to the film industry. But the train has left the station and is chugging along.
In India, logistics has had the kind of omnipresence that was more ‘all over the place’ rather than ‘consolidated’. The myriad of taxes and the lack of oversight have resulted in a highly fragmented sector. But as we have seen earlier, with implementation of the GST Bill, the distribution of goods and services will be fast-tracked to improve operational efficiencies and cost savings. Estimates suggest that freight times will come down by 30–40%, and costs by 20–30%! Any impact on logistics will impact the sectors it is associated with – which is, almost everything. Let us examine the changes GST will bring upon the sectors where logistics is paramount :
Third-Party Logistics: The removal of cascaded taxes and other costs across the supply chain is an added incentive for companies to either set up its own logistics wing or tie up with domain experts — the 3PL providers. GST is poised to organise what is otherwise an unorganised industry in 3PLs, with the anti-profiteering clause. Hence, the unified tax structure will reinforce companies’ faith in outsourcing their logistics operations from a security perspective as well.
e-Commerce: A product sold in Karnataka with a 5% tax rate on it would be charged around 15% of the same in Delhi. Hence, the prices listed online in e-Commerce marketplaces are in compliance with the rate in Karnataka, thereby making it cheaper than what local retailers would charge. Post GST, standard tax rates will eliminate this tax arbitrage, bringing e-tailers and offline retailers to the same level in terms of pricing.
Also, the warehousing strategy of e-Commerce companies would also need to be changed, to meet the proximity needs for the customers, and not be tax-driven. The warehouse consolidation project we discussed earlier is a timely step towards achieving this.
Retail: Small retailers with turnover of upto Rs. 50 lakhs can avail benefit of a composition scheme where tax can be paid at 1% of the revenue. Online marketplaces have played a crucial role in revitalising offline retail stores, helping them leverage larger revenue channels. Under GST, those e-tailers will have to deduct 2% tax per transaction while making payments to retailers listed on their portal. This Tax Collected at Source (TCS) will be handed over as collection towards GST to the government. This could deter smaller retailers from collaborating with e-tailers as it may not offer the envisaged benefits. The change-up in warehousing could also lead to decreased logistics costs for the retail industry.
FMCGs: In accordance with the government’s stance at keeping tax rates low for mass consumption products, the GST tax rates for such items have been put under the 18% tax slab, from the current rate of 22–24%. Nearly 81% of all products are within the 18% tax bracket, while the rest fall under the 28% tax slab. Lower prices could potentially support volume growth for certain products, particularly in the rural segment. FMCG majors with broad portfolios are likely to see a mixed impact, since different products under them could face different tax slabs.
Services: Despite being a solid contributor to the nation’s GDP, the service tax revenue predominantly comes from around 2% to 3% of the enterprises within the services sector. The presence of a plethora of small establishments with low value addition could be attributed to the sector being taxed at 18% under the GST regime, a 3% increase from the current rate. The differential rate between the goods and services sectors could lead to a form of arbitrage practice, where people would prefer leasing services for a cheaper rate as opposed to buying them.
As you may have noticed the trend, the profitability of the logistics sector is set to soar. But there is no reason to stop there. Delve deeper with Locus’ Route Optimization and 3D Packing Engines as we take you a step further by making the best use of the GST regime, with higher operational efficiency, cost savings and better business decisions. With warehouse consolidation, wider reachability, and heavier goods traffic, the roads are about to get denser, so stay ahead with Locus.
It is the inevitability of logistics that keeps its footing firm, despite the radical changes around it. The ‘one nation, one tax’ regime could be seen as an indirect acknowledgement of that fact.