IMPACT OF GST ON LOGISTICS Karan Ajmera

GST

Stands for Goods and Service Tax

Broad based, single, comprehensive tax levied on goods and services consumed in an economy

Seen as the panacea for removing the ill-effects of the tax-on-tax regime

LOGISTICS IN INDIA

Interplay of infrastructure, technology and new types of service providers

Rapidly Evolving

Backbone for some key sectors like retail ,automobiles, pharmaceuticals etc.

Contributes to around 13% of Indian GDP

Top 10 Players in 2014

DHL , Bluedart , TNT Express , Agarwal Packers and Movers ,UPS ,FedEx,

DTDC ,Gati , Aegis ,All Cargo Ltd.

GROWTH OF LOGISTICS OVER THE NEXT 5 YEARS

Lets assume the same CAGR rate of 9.9%

10.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

120.4 132.3145.4

159.8175.7

2014 2015 2016 2017 2018

In Billion US$

THE NEW CHANGE

1) CHANGING FOR THE GOOD

Indirect taxes played a major role in deciding the supply chain structure

of each business as some of the tax cost had no input credit option.

The GST precisely addresses this anomaly and therefore, going forward,

tax may not be a factor for deciding on the supply chain /distribution

channel of an organization

2) WAREHOUSING

Any large LSP, manufacturer or CPG player maintains warehouses in all the states of operations

With 33 states in India, that accounts to 25-40 small warehouses (depending of regions and scale of operations) instead of 6-8 large warehouses which would be needed for geography of this size

Adding to this inefficiency is the fragmented structure in Indian Logistics industry which results in extreme competition

WAREHOUSING

Demand for warehousing is expected to grow at a CAGR of 18% in the next 4 years - thanks to the incoming investment in the retail sector and increasing import-export activity in India.

So, warehouses have a lot to do with the growth of logistics sector.

With the advent of GST and Zero CST :

The necessity of having a warehouse in each state to avoid CST and paperwork will be eliminated in a GST regime and network decisions would become purely cost & service driven.

So now , we can revisit the supply chain network and identify opportunities for consolidation of warehouses to gain from scale and save costs of double handling

We can club many of the small warehouses and have bigger and fewer warehouses.

THE EXPECTED CHANGE !!

BENEFITS :

The larger warehouses can benefit from technological sophistication by deploying state-of-the-art planning and warehousing systems which are not feasible in smaller, scattered warehouses

IT costs of having ERPs deployed at many small warehouses can be saved

Transportation lot sizes will automatically increase, making way for more efficient bigger trucks

Lesser numbers of stocking points

3)TRUE 'HUB-AND-SPOKE' SYSTEM

Organizations will now be able to explore different distribution models such as setting up mother warehouse and regional distribution hubs .

Thus , it can possibly step away from traditional C&F and distributor based models currently adopted

4) REDUCTION IN COST

Reiner A. Allgeier, MD, Schenker India.

I believe, with GST, logistics and distribution costs in India could go

down by 10-15 per cent.

Cost drop will increase Profit Before tax by 10-15 % in turn increasing the PAT by around 7-11% .

(Assuming tax to be around 30%)

This means that GST will strengthen the bottom line for all the logistic companies and thus ,better margins.

This also helps the company with better cash flows .

5) TRANSIT TIME

GST would also improve our transit and, consequently, delivery times because state border crossings would likely be uncomplicated.

Less of paperwork is also a big benefit.

6)FAIR PLAYING FIELD

As a result of reduced tax liability, GST will reduce the share of the unorganized sector in warehousing.

Prices charged by the organized players will come down and reduce the price advantage that the unorganized warehouses currently enjoy.

Thus, GST will level the playing field and create an equitable development of the industry across India.

HOW CAN LOGISTICS ADAPT THIS NEW CHANGE This can be done in various ways –

Designing a multi tiered distribution network where there is specialization in certain functions (storage and inventory management) and some functions (software services, packaging, labelling) are outsourced.

Another will be to partner with a 3PL logistics provider to ensure optimal utilization of resources.

They will need to take a fresh look at their supply chain to cater to existing geography and should also look at the new business areas that this impending legislation is due to bring.

HOW CAN LOGISTICS ADAPT THIS NEW CHANGE

ERP System Changes

Pricing Revision

Revisiting Warehousing & Distribution Strategies

Revisiting Purchasing & Marketing Strategy

CONCLUSION

The impact or rather the opportunity is huge for both the logistic company and their customers to completely relook at their supply chain.

This essentially means a significant opportunity for Logistics companies in India to revise their infrastructure to deliver as well as reverse logistics for spares and replacements.

 

Thank You