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The Post GST Logistics of BIGGER WAREHOUSING

The Post GST Logistics of BIGGER WAREHOUSING

GST, which will usher in uniformity in taxes across the states of India, will set up a level playing field through a more business friendly rate of taxation.

India´s burgeoning logistics and warehousing sector is set for an explosive growth trajectory, in the wake of the implementation of the Goods and Services Tax (GST) regime. Big (warehousing) will become the norm for the manufacturing and consumption sectors, transforming the current industry practise of having a spread of storage facilities across every state of India they do business in, to avoid the existing multiplicity of Central and state-wise tax levies.

Put simply, the current variable and multiple tax levies in different states of India compels industry to show the movement of goods and products across states as a transfer from one storage facility to another.

Showing this movement of goods and services as a sale would attract a variable tax rate depending on the state the delivery is being made to, rendering the business non-competitive on aspects of pricing.

This trend led to the under-exploitation of the basic business premise of economies of scale, that the e-tail and manufacturing sectors could have benefitted from in the huge market of consumers that India represents.

The GST, with uniformity in taxes across the states of India, will set up a level playing field through a more business friendly rate of taxation.

The recent GST Council meetings remain unresolved on the draft bills of Central, State and integrated GST and the distinct primacy over assesses between the Union and state governments based on the threshold levels of annual turnover of assessees. Similarly, consensus eludes the government stakeholders across India on the law that spells out the compensation formulae for the loss of revenue of states in the first five years of the rollout.

The Council is scheduled to meet again on December 11 and 12 to thrash out the issues and arrive at a consensus, crucial to the new uniform (although with seven distinct tax rates) regime to be kicked in by April 1, 2017.

´Are we close to a resolution? I will keep my fingers crossed,´ was what Finance Minister Arun Jaitley told media persons when asked whether consensus would be reached in time on key issues to roll out the new tax regime from April 1, 2017. The constitutional amendment that envisages the new tax regime in place of the existing plethora of Central and state levies currently in force, makes it incumbent for the GST regime to be incorporated at the latest by September 2017 (within a year after the notification on the tax was introduced in Parliament) which necessitates the introduction of the new regime in the absence of any other alternative, according to Jaitley.

´I am hopeful there will be a positive movement as far as laws are concerned during the next meeting on November 11-12. On the critical issue of cross-empowerment, two to three suggestions have come,´ he added.

However, the makers and movers of goods and services listened with rapt attention on December 3, 2016, when Jaitley spelt out the roadmap ahead and said that the GST tax rates would be progressively rationalised (read reduced to a lower and new normal rates) after assessing the first year dynamics under the new tax regime. Jaitley, while speaking at a leadership conclave organised by the Hindustan Times, said that the country was moving towards a progressive tax regime where a self declaration model of filing annual returns is the key emphasis, with only a small percentage of the tax returns filed that will be taken up for scrutiny by tax authorities.

´Around three hundred thousand people are picked up for tax returns scrutiny every year, which is a very small fraction of assessees which will dis-incentivise tax evasion. We cannot defy technology and the decision of demonetisation has only accelerated this. If you look at the temperament of this country, there is always a section that is reluctant to change,´ Jaitley said.

India´s finance minister was very positive that the volume of formal trade as well as business would grow in size. The de-monetisation drive will reduce the quantum of paper currency, he emphasised.

Jaitley´s averments are largely endorsed by the industry projections on the warehousing and logistics sector made by the Knight Frank research report on the warehousing sector. However, in the warehousing and logistics sector, this would necessitate opening up the agricultural warehousing (large godowns spread across the length and breadth of India) to the dynamics of the free market economy as they are government controlled and exhibit caps on constructions/development potential. According to the Knight Frank report on logistics and warehousing projections for the next four years, the Mumbai, Pune, Ahmedabad, National Capital Region (NCR), Bengaluru, Chennai and Hyderabad regions will witness a growth from 621 mn square feet in 2016 to 839 mn square feet by 2020. Currently, 17 mn square feet of warehousing space is transacted annually in these seven markets.

´A massive 218 mn square feet needs to be added within the next four years in the top seven warehousing markets of India. With investment returns of 22 to 24 per cent per annum, Pune offers the best investment opportunity in India. The requirements of warehousing for the e-tail segment will more than double from the 14 mn square feet in 2016 to 29 mn square feet in 2020,´ the Knight Frank report projections indicate.

The private sector will go into hyper active mode of warehouse creation to meet the supply side dynamics driven by the sharp incremental demand for warehousing in the manufacturing and consumption sectors. This is expected to be boosted by the requirement of storage of raw materials and finished products from industries like automobiles, cement and food processing and the consumption sector demands ranging from apparel and footwear to home and lifestyle products.

Interestingly, the research report does not factor in the demand and supply dynamics that would emerge in the agricultural warehousing sector that is a mostly unorganised market. This government-regulated segment does not follow the principles of a free economy driven market besides being a largely unorganised market. ´The government contracted agriculture warehouses have caps on rentals and construction costs, thereby distorting free market economics,´ the KF report points out.

The report also points to the export-import based warehousing requirement that is serviced via container freight stations (CFSs) and inland container depots (ICDs) that follow different market dynamics distinct from the remaining segments of the warehousing industry. This segment is also not factored into the researched report and therefore would only add, along with agricultural warehousing, to the exponential development and growth trajectory predicted by the report.

For Indian business the dual impact of a new tax regime (GST) and the freshly introduced demonetisation drive are likely to work as a catalyst for infrastructural development, especially in the wake of huge infusion of liquidity into the banking system of the country. This will benefit and bolster the ambitious warehouse creation plans in not just the seven warehousing hubs in India, but also result in the proliferation of more such infrastructure creation, especially on peripheral sites to the major and minor ports of India.

Big ticket private investments are also going to be the key to ´Big´ becoming not only ´better´ as a smart business practise, rather than the current multiple warehousing standards followed by industry in India.

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