Changing the Way We Do Business

Magazine: Logistics Times, National

June, 2011.

Further, local levies of octroi and entry taxes make organizations to have their warehouses outside city limits till such time that the sale is effected. There is no inter-dependence or pass through of these taxes paid which results into multiplicity of tax costs being embedded into product prices which ultimately cascade to the final consumer.

India is at the threshold of its biggest tax reform in its independent history. India would soon be adopting a Dual Goods and Services Tax (GST) model under which both the Centre as well as the States levy the tax. GST will be a broad based, single, comprehensive tax levied on goods and services wherein it will get levied at every stage of production till distribution chain with input tax credits and set-offs available in respect of taxes paid up to the previous stage, thus eliminating the cascading effect of all taxes with the tax sticking only on the final consumption of goods or services.

GST which will get charged by the centre will be known as Central GST which will subsume central excise duties, CVD, and service tax. The State would levy a State GST which will subsume VAT/sales tax, state taxes and levies. Whether octroi and entry taxes would be subsumed is still not known, but we hope it does.

As the GST structure evolves, organizations will adjust their supply chain strategies to meet the changing landscape of manufacturing, consumption as well as distribution of goods across India. Therefore, GST is likely to be the biggest inflexion point especially for the entire logistics industry in India throwing up immense opportunities under the new GST regime. The biggest opportunity which it brings in for supply chains is that it will unify India into a common single market allowing organizations to consolidate their supply chain operations on a pan India basis. The tax disincentive of interstate sales and supplies will go away and there will no longer be a necessity for setting up Distribution Centres at a state level. With a single tax rate, which will bring neutrality of tax costs across states, manufacturing will move closer to the places of demand, and warehouses would lose their fiscal significance. Supply chains will get re-engineered and aligned to the real market dynamics based on product flows and a need to faster reach the markets of consumption. Organizations will try to find ways to improve their performance; supply chains and warehouse operations will be the area where the logistics managers will focus to gain maximum efficiency for minimum cost.

It will make large regional warehouses economically viable and business will consolidate their warehouse operations and extensively operate on the hub and spoke as their distribution model. The need for large scale quality warehousing space will increase since it will be better to have a few efficient centralized inventories at regional levels than several small distribution centers at every state level, which are difficult to track and maintain. Warehousing will move up the value chain and will no longer be meant for mere stocking but will be an integral part of the sales activity of order fulfillment and improving service levels.

Going forward, the growth in warehousing will come from investments in space optimization, automation and technology adoption, and skilled manpower. Investments would see an upswing specially into operations and technology integration which will help reduce costs, improve productivity and accuracy, while giving complete visibility of the inventory data to the organizations. Integrated Warehouse Management System, Transport Management Systems, RFID tagging, ARAS, use of mechanized handling equipments will be some of the differentiating factors which will help in increasing the efficiency and productivity of warehouses and as the industry matures, it will see a move towards outsourcing to advanced 3 PL service providers.

The Government's focus on infrastructure development in projects like the Golden Quadrilateral, North-South and East-West Corridors and the dedicated freight lines will provide a further impetus to the overall growth of the logistics industry and warehousing will get aligned along these freight corridors.

Like any path breaking tax law, it will come with its own challenges. In absence of a framework to determine the place of supply rules to define which respective state would have the jurisdiction to levy the State GST on the inter-state goods and services under the destination principle, will be one of the crucial issues under the Dual GST model. Hopefully the Place of Supply Rules will get announced soon to address this issue.

At a macro level, GST will undoubtedly provide an impetus to economic growth in India leading to a gain in GDP. As per the Task Force Report, India's GDP gain will be within a range of 0.9 percent to 1.7 percent corresponding to between Rs. 43,000 Crores to Rs. 84,000 Crores.

Further, GST being destination based taxation would mean zero rating of exports thereby Indian products becoming internationally more competitive. Exports are estimated to register an increase especially in sectors like textiles, readymade garments and machinery. Gains in exports are expected in the range of Rs. 24,000 Crores to 48,000 Croore and imports likely to gain in the range of Rs. 31,000 Crores to Rs. 62,000 Crores.

In conclusion, every stakeholder would gain under the GST regime which has the potential to transform not only the tax system in India but also the way we organize and do our business.

-Varun Dhawan, VP (Taxation), Blue Dart