Logistics in a general business sense, is the management of the flow of things between the point of origin and the point of consumption in order to meet requirements of customers and suppliers. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing and often security.
Although logistics industry has gained immense significance over the years and is a major contributor to our national GDP, the logistics sector in India remains highly fragmented.
The Indian logistic industry is s projected to grow at CAGR of 15-20% during FY16~FY20., led by 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.
Despite these reasons, the logistic sector in India remains encumbered in several complexities which primarily includes higher logistic costs and complex tax structure. The implementation of Goods and Service Tax (GST) bill is expected to trim the logistic costs upto 20% from the current levels.
The Indian logistic sector is primarily categorized into four segments comprising transportation, warehousing, freight forwarding and value-added logistics. Transportation alone holds 60 per cent share of the logistics industry and rest 40 per cent is contributed by the rest. Within transportations, road transport holds the lion’s share followed by railways.
Current Issues and Challenges of Logistics industry in India
Despite being a low cost service providing country, logistics costs in India are higher relative to developed countries due to various issues and challenges faced by the industry.
The biggest driver of inefficiency is the complex tax structure. Currently, each of India’s 29 states taxes goods that move across their borders at various rates. As a result, freight that moves across the country is taxed multiple times. It is common to see long queues at interstate check posts, as the authorities examine the freight which is moved and levy taxes which are applicable. Truck delays amount to 4-5 hours of wait time at interstate check posts.
The inter-state system of transport taxation has compelled organizations to put up warehouses in every state, thus making the supply chain longer than it needs to and therefore to a large extent inefficient. Given the complex structure, the transport industry ends up spending almost 50-60% of its time and resources on tax compliance, together with trucks queuing up at interstate check points for tracking and inspection of inter-state sales tax. Transporter also have to comply with a number of forms for recording the movement of goods in and out of State jurisdictions. Present processes also necessitate the transporter to carry the hard copies of the invoice and forms along with them.
The industry is also affected by poor rate of customs efficiency of clearance processes and procedures thus affecting the international export logistics stratum. Furthermore, sub-optimal Indian infrastructure combined with lack of implementation of efficient IT-enabled tracking and tracing mechanisms has adversely affected the performance of logistics. The current article delineates upon the complex tax structure issue faced by the logistic industry and the benefits that this industry would derive upon implementation of GST, thus providing respite to certain extent to the industry
How Goods and Service Tax (GST) would benefit the Indian logistic industry?
GST will subsume 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. It means same level of tax applicable on a specific product or service across the entire country irrespective of where it is being manufactured or consumed. The current combined Centre and State statutory rate for most goods works out to be 26.5% (Cenvat of 12.5%, and VAT of 14%), whereas post GST implementation the same is expected to reduce to standard rate of about 18% which will be levied on most goods and all services.
|Interstate tax burden||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.|
|Nature of the industry||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.|
|Logistic time||Due to trade barriers such as entry taxes, local body taxes, OCTROI and other hurdles, trucks lie idle for 30 to 40% as per industry estimates during their delivery schedule.||Phasing out of border check posts will result in improvement in operational efficiency along with reduction in logistic cost during the transit. As per world bank estimation Indian corporates can save upto 30-40% of logistic costs incurred due to stoppages at various tolls and check posts.|
|Cost||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.||As GST applies, full credit will be available on interstate transactions and it is no longer required to maintain warehouse in each state purely for tax reasons. Logistic costs thus are expected to be decreased by 1.5 to 2.00% of sales on account of optimization of warehouses leading to lower inventory costs|
The logistics and transportation industry is worth more than $130 billion. It is an important cog in the entire infrastructure superstructure. For India’s economy to gallop, a leaner and more efficient logistics industry would be paramount and the GST could facilitate smoother and better transport. It will replace the age-old cumbersome and inefficient transport system that was built around individual state taxation system. Logistics should ideally make core operations more efficient, but it finds itself caught in the complex of compliance and regulation. With a single GST, checking and tracking of sales tax at inter-state barriers would not be necessary. According to a recent survey, if the waiting time of trucks is reduced by 50%, it would add 8% additional trucks on the highway.