Home » GST will help companies reduce logistics costs by up to 1.5percent

GST will help companies reduce logistics costs by up to 1.5percent

GST will help companies reduce logistics costs by up to 1.5percent

GST, a new uniform indirect tax regime for the entire nation, will facilitate a single unified and common market, says IVAN DA COSTA, President, Global Ocean Group.

The top seven warehousing clusters in India expect to add 218 mn sq ft of space over the next four years, since large warehouses will become the way forward after the uniform GST regime comes into force (from April 1, 2017). What´s your opinion?
According to me every move has an advantage and a disadvantage. The business success depends on the ability of a company to factor in variables and continue to stand firm.

How do you see the road ahead for logistics providers and warehouse developers?
Warehouses will be chosen, post GST implemen¡tation, to rationalise costs to the company as well as price reduction for the end user.
Earlier, the local state taxes were the mitigating factor for consideration by companies before they finalised their warehousing requirements of location and size. The obvious advantage of GST for the warehousing sector is that consumers will be able to consolidate bulk stocks to simultaneously meet supply side demands at fast paced warehouse hub regions for the company seamlessly, instead of being spread out thinner at multiple warehouses with smaller size dynamics that result in cost inefficiencies. This will bring improvement to all the clusters by also eliminating wrong calls made and enhancements for smoother operations.

The apparent disadvantage of GST for warehousing is that companies will have to recalibrate through proper logistics planning for specific cargo to be picked up from a particular warehouse, the route of transport while dealing with multiple destinations simultaneously. This might affect supply side dynamics through delays of supply for urgent deliveries or when lower lead times are available.

Logistics Providers
Logistics providers are growing on a steady scale through e-commerce, economy revival, the proposed GST implementation and government policy initiatives like ´Make in India ´.

A logistics company bears around 60 per cent in transportation costs and 40 per cent costs towards warehousing, freight forwarding and other value-added services. The implementation of GST will result in growth of around 1 per cent to 1.5 per cent as logistics operations have a direct correlation with economic activity. Logistics costs would be trimmed by as much as 20 per cent from the current levels.

GST is a mixture of two tax duties – central (excise duty, countervailing duty, service tax) and the state (value added tax, octroi as well as entry tax and luxury tax)-accruing to governments when an end user purchases goods or services.

In short, the same level of tax will be charged by the government on a specific product or service across the country, irrespective of where it is manufactured and sold in different states.

The central and state tax rate is currently 26.5 per cent whereas, post GST, the tax level will reduce to 18-21 per cent on most good and all services.

GST will also help companies reduce logistics costs by up to 1.5 per cent to 2.5 per cent as it brings in three key structural changes. India will become a bigger market with fewer and larger warehouses. This will lead to bigger and larger number of trucks on roads.

How should they gear up for the surge in demand for mega-warehousing post the uniform GST tax regime?
In my opinion, the warehousing business will be automatically boosted due to GST implementation. Here are a couple of suggestions:
1)A consensus meeting of all stakeholders, including top logistics and warehousing companies in India should be convened by the Union Government. The surge in demand for mega-warehousing will be the consequence of the e-tailing business.
2)We need to connect existing companies in the warehousing business that have exhibited strong fundamentals over a period of time.
Profit making is the first motivation of business. So it flows that a profitable scenario with projected earnings more than current business flows would naturally give an impetus to the logistics business. Post GST, warehousing companies will factor in the pros and cons of real world business realities. There is also a need to target companies that are unable to keep pace with the emerging new dynamics allowing for economies of scale.
There will be a clean system of whose cargo is to go where, a seamless chain of business as logistics companies won´t be affected much, while warehousing will be impacted. There will be fewer warehouses, but bigger and larger ones. There will be a lot of investors keen to invest in the business as dormant partners, in view of the obvious growth trajectory being projected.

3. The will be absolute transparency in all business positions of logistical contracting resulting in competitive movement by all stakeholders.
GST and the flagship scheme of ´make in India´ will boost a large demand for warehouses and push manufacturing and e-tail away from the tax avoidance way of doing business thus far (having smaller warehouses across all states in India).

Is ´big´ going to be better business for warehousing? Further, is it a reasonable expectation of logistical costs coming down in India to 12 per cent, as being espoused by stakeholders?
´Big´ means large space. The companies or firms having warehousing businesses on a small scale will be adversely impacted as new and larger warehouses will be set up. Business will move to big warehouses as their cost will be lower. Big warehouses will store cargo on rental basis with multiple clients using the same warehouse. Big players will benefit by the change in warehousing disposition. However, the routing and transportation will have to be better planned to avoid delays in the delivery of goods to clients. Small warehouse companies will have to invest to grow in physical size through a conglomeration of several small size warehouse owners.

The Indian logistics sector comprises two-thirds of the space occupied by the freight cargo business while sea, rail and road account for the remainder. The last 60 years hasn´t seen a lot of transformation in logistics infrastructure.

Freight divisions have not witnessed balanced and adequate investments. There will be increased investments in the railways to create capacity additions and to support the movement of greater volumes of freight traffic. This will result in more spends on DFCs, rolling stock and other additions like new tracks, rail line doubling and gauge conversation.

The investment of $200 billion in the national highways sector. especially on high traffic density stretches, will increase the road length of national highways by 60 per cent and the state and major district roads including expressways by 15 per cent by 2020. Consequently, by 2020 service quality and fuel efficiency will improve greatly between 6 per cent and 30 per cent.

The logistical cost efficiency brought about by the new GST tax regime will become apparent within a year of its implementation.

What is holding back ago-warehousing from enjoining with the mainstream industry? How realistic are the caps placed on rental and construction costs for warehouses in the agri-sector that are mostly serviced by the government operated warehouse logistics companies?
Warehousing is a means of storing products temporarily till such time as they are delivered. Agro warehouses are limited in this respect due to the perishable nature of most of the goods. Given this fact, that a huge quantity of government procured food grains are kept in open storage for months together, the risk of quality deterioration does not need to be explained. Warehousing capacity of 35 MT needs to be created in the country during the 12th Plan period to ensure that the demand for storage of agro commodities are adequately taken care of. The government sector logistics companies, that mostly handle agricultural warehousing, need to recalibrate this very sensitive segment of warehousing. Agricultural warehousing accounts for 15 per cent of the warehousing market in India and is estimated to be worth Rs.85,00 crore. The base investment required to start an agro-warehouse is around Rs.1.7 crore.

How does industry react to the tariffs levied by the government – port congestion tax and haulage charges – that are detrimental/dampeners for the profitability of doing business? Are there adequate turnaround time operational dynamics in place in Indian ports to justify these levies?
The infrastructure at ports is very poor where a lot of time is being consumed by trucks or container liners. Different lines have differing costs based on PCS, IHC depending on the line as the service varies from line to line. ZIM line has low freight charges, however, the operations of the line is very poor, while the PCS is very high. NYK, OOCL, MSK, EMC have almost similar service while prices differ. The profits of companies are harmed as the THC, PCS and IHC are increasing due to poor infrastructure. Firms are routinely charged detention charges as their time slot expires while their goods are still in the yard while cargo traffic is incessant. The turnaround times at ports are inordinately long and it takes hours and even a whole day to simply exit the port due to congestion and traffic. Extra time slots for containers to move during such traffic snarl times should be introduced. The Railways has withdrawn the port congestion surcharge on goods originating from ports as of April 13, 2016. Similarly, CONCOR has also withdrawn the port congestion charges from its tariff rates, which is a good move.

The business cost of delays on the transportation side of these businesses is pegged at $ 6.6 billion per year due to truck stoppage time and other supply chain delays. What needs to be done to rectify this?
The first thing to rectify this is to create infrastructure where there is high traffic density. Shippers are being penalized for the lack of co-ordination between government agencies during peak traffic times. There is a need for more than one line of entry and exit from ports. Big time investments have to be planned in this segment. At any given time there are several shipments coming into ports, but port services are terribly slow, which seems aimed at placing incremental costs upon the importers. Checkpoint staff are inefficiently slow. Multiple check points would better streamline this process and cut down the unnecessary delays. This will improve supply chain efficiencies and the working will be smoother.

The unproductive transit hours, as well as regulatory hurdles, delay overall manufacturing and trade. However, a unified tax and regulatory environment under the GST will help improve the delivery process and cut down on transport costs and hassles. This will lead to substantial reduction in distribution costs to the extent of 10 per cent to 15 per cent and reduce the final cost price of goods.

The manufacturing sector is being encouraged with policy, infrastructure, finance, ease of doing business and many other initiatives by the Indian government. Can this help scale up manufacturing operations to increase this sector´s contribution to GDP to a share of 25 per cent as is ambitiously being propounded?
The Government of India, once it starts GST, will facilitate the interstate movement of goods.

At present, state borders have check posts, which often stretch transit time for goods to move from one point to another. The hurdles delay overall manufacturing time. GST should remove the need for interstate check posts, so the turnaround time for freight movement will be faster, and trucks will be better utilised.

The implementation of GST will usher in more transparency in working and ensure a smooth supply chain, plus ensure high investments in the freight business in coming years. India´s GDP will go up due to higher investments and increased tax revenue.

How is the current scenario in the logistics industry – in terms of different transport modes (road, rail, air, and water), technology adoption, etc?
Often, government rules have constrained the industry, stopping it from realising its true potential. However, more roads are being built, and the existing ones are being widened, all measures which will prove beneficial to the industry in the long run. After the implantation of GST, the scenario is only likely to improve.

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