The Indirect tax system in India is very complicated. This results in corporations taking advantages of the laws due to the labyrinth of relaxations and small companies getting bullied by the authorities due to their lack of knowledge. Logistics is where indirect taxed affects the most and there are changes coming which companies should take full advantage of.
Complications in logistics
The cost of logistics in developed countries is 8% of the GDP. For India, it’s 13%. And just because of the inefficient indirect tax laws and then the strategies that logistics companies use to tackle them. The high burden of logistics cost is also because India behaves as 29 different countries. A freight travelling from Tamil Nadu to West Bengal is taxed a multiple number of times. Also, the long queues at interstate check post amount to an average wait time delay of 6-7 hours. Still 65% of the freight in India moves by road and according to World Bank estimations, Indian companies could save up to 30-40% logistics costs, a good look and necessary changes in the laws can give a huge boost to our GDP.
GST, a potential solution?
- When a company is making the strategical decisions about where to base its inventory and about the distribution models, the most important factor becomes the levy of Central Sales Tax and varied state-Value Added Tax (VAT) rates and provisions. Operational and logistics efficiency becomes the second priority. However, once, GST comes, the tax will be levied on stock transfers and full credit will be available on inter-state transactions. Thus, the decisions on warehousing and distribution will be free from tax considerations and be purely based on operational and logistics efficiency.But GST won’t be all good for the transportation service providers also. Right now, Many reductions (which won’t be continued under GST) are provided to transport service providers under the Service Tax law. Also, the tax would be paid by the transport provider instead of the recipient of the service. Thus, businesses need to rethink their market and warehousing strategies.
- But GST won’t be all good for the transportation service providers also. Right now, Many reductions (which won’t be continued under GST) are provided to transport service providers under the Service Tax law. Also, the tax would be paid by the transport provider instead of the recipient of the service. Thus, businesses need to rethink their market and warehousing strategies.
- Another change due to GST would be the change in Inter/Intrastate warehousing and sales strategy. Right now, to save CST many logistics companies use a multiple warehouse strategy. What they do is they operate though many warehouses throughout India, one in every state. Then, they declare transfer of goods as a stock transfer, which is not taxable under CST. The goods are then sold intra-state. However, once GST is implemented, there won’t be any difference between interstate and intrastate sales. Thus, the multiple warehouse strategy will be ineffective in reducing the inter-state tax incidence.
- Having various small warehouses would be inefficient and thus, organisations would tend to scale up the warehousing to a large central warehouse. Thus, this will cut the administrative cost of operation of multiple warehouses. Thus, services and warehouses will tend to be concentrated around major metropolises such as Mumbai, National Capital Region (NCR), Kolkata and Chennai. Thus, the transport routes will change and more roads and infrastructure will be needed around the metros.
Things other than GST to be done
- As the pattern changes, the service pattern would change. Thus, a need to create logistics and transportation hubs is created. An exhaustive study should be commissioned by the government to identify the infrastructure requirement. This would also relieve the stress over the players uncertain about the changes the GSTs implementation would bring.
- A mechanism is needed for centralised registration and compliances, otherwise, it would cost the service providers. Only, a centralised registration would enable the service provider to claim and utilize the credits on expenses incurred en route.
GST looks like a big blessing to logistics sector and it is high time that we cut the costs of logistics to become a more developed nation. This would also decrease the cost of production and the profit margins of the seller. But the implementation and mechanism are needed. Growth is good but it should be regulated. Growth for just growth’s sake is the mentality of a cancerous cell.