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Impact of GST on 3PL and Warehousing in India

According to World Bank’s 2016 statistics on Ease of Doing Business, India ranks 130 out of 189 economies which is only a marginal improvement on the 2015 rank of 134; while China and US rank 84 and 7 respectively. World Bank’s rankings on Logistics Performance Index (LPI) peg China at 9 and US at 10 compared to India’s rank of 35 in 2016 (an improvement on India’s rank of 54 in 2014).

3PL or Third Party Logistics and Areas of Improvement

In India, the concept of the third party logistics is still at a nascent stage. It looks to be developing in the recent years with analysts forecasting growth at a CAGR of 21.16% over the period of 2013-2018.

India’s growth story is directly linked to the state of infrastructure in the country. The work done to improve this has not been very impressive over the past many decades. This has ensured a lethargic and infrequent growth for the Indian economy. It would be safe to say that owing to this road network is incomplete, rail network has not been upgraded significantly in a long time and sea and inland waterways are underdeveloped still. The present government has given enough indications that it is finally addressing these issues in a significant way. However, this has been marred by the complex nature of the logistics industry in India. Improving the infrastructural deficiencies and improving the logistics industry involves a coordinated effort by different ministries which are different decision making bodies. The still imperfect coordination between the ministries has also led to inefficiencies when it comes to implementation. There is also the issue of constantly changing complex federal tax structures. Our suggestion is to have an overarching body that ensures that the above mentioned gaps are plugged and India’s logistics infrastructure gets a big boost. Another factor which will positively influence the sector is the faster technological adoption by players in the field. It is important though that this step coincide with the upgradation of infra in the country. This is possible if long term investments are made in automation while making the most of existing resources.

GST and 3PL

Although every factor is going to positively impact the third party logistics (3PL) sector in India. But, it is the introduction of GST that will most incentivise the sector. Goods and Services tax is expected to act as the secondary factor which will build upon the primary foundation of a good infrastructure and the faster adoption of technology in the sector. GST will ensure that the nascent 3PL further embeds itself in the logistics space. Further, it is the implementation of the GST that would increase productivity and raise efficiency levels in the logistics sector and the economy as a whole. According to various industry estimates, freight times will come down by 30-40% and logistics costs are expected to reduce by 20-30%.

The quantum of investment from the private sector, government regulation, the investment in infrastructure by the government year on year are all factors that determine whether the logistics sector will grow or be inhibited. The logistics sector in India has been performing well in the last few years growing at a rate of 15% annum. However, it is the implementation of GST which will give the sector a much needed impetus in India.

The Goods and Services tax will be a comprehensive nationwide single tax which will subsume the plethora of taxes in the country. GST will be a single tax on manufacture, sale, and consumption of goods and services throughout India. The purpose behind this move is to have one indirect tax for India which will make the country a unified common market.

The central taxes which will be subsumed into the GST are: Central Excise duty, Additional Excise duty, Service tax, Countervailing duty, and Special Additional duty of Customs. Also, the state taxes which will be subsumed by GST are: Sales tax, Entertainment tax, Central Salex tax, Octroi and Entry tax, Purchase tax, Luxury tax, and Taxes on lottery, betting and gambling. GST will be collected at every stage of sale or purchase of goods or services, based on input tax credit method. This simplification of the taxation system would make the inter-state transportation of goods more efficient.

The logistics sector in India, including 3PL is a highly fragmented sector with highly inefficient supply chains of the firms. After GST implementation, companies will have an added incentive to either develop its own logistics arm or tie up with the domain experts which are the 3PL companies. This will benefit the companies as a system of seamless tax-credits throughout the value chain and across state boundaries will bring down the cascading effect of taxes and thus reduce the hidden costs of doing business, especially the benefits of entering 3PL will increase.

For logistics players, streamlined logistics processes and better bottom lines will lead to consolidation of the sector. Further, newer players will enter the arena and investors will find it lucrative to invest in the sector knowing that returns are guaranteed in a much more predictable business dynamics. Plus, existing players are fully expected to scale up the business environment that will follow GST implementation in the logistics sector in India.

GST and Warehousing Industry in India

Also, as per analysts, Goods and Services tax is expected to consolidate the Indian warehousing space. With GST set to become a reality from April 2017, owners and manufacturers with warehouses (owned or leased) in multiple states to avoid duplication of taxes will can own or lease large warehouses per business requirements. The consolidation of the warehousing industry will also bring down the costs involved in the warehousing industry in India.

Ecommerce, automotives, consumer electronics, pharmaceuticals, FMCG players will, post GST application, own/lease larger warehouses at prime locations like Mumbai, Delhi, Ahmedabad, Chennai, Bengaluru and Hyderabad.

The warehouses which will become idle or defunct through this process are the ones in the smaller cities. These are expected to be put to residential or commercial use. The consolidation in the warehousing sector will lead to cost efficiency as transportation, labour and real estate costs will reduce. The total warehousing space requirement in the top seven markets is expected to grow at a compounded annual growth rate (CAGR) of 8% -from 621 million sq ft in 2016 to 839 million sq ft by 2020 -estimated the Indian Warehousing Market Report 2016 by property consultant Knight Frank.

GST will further push direct sales, i.e., inventory of goods will come down. This will happen as post GST, more goods will move directly from manufacturing hubs to distributors which will lead to lower warehousing costs and increased efficiency in the supply chain.

It can be safely concluded that GST will have a positive impact on the 3PL or the warehousing sector in India. We, as an organisation and as an industry have long believed that GST is a concept which is a must to improve business conditions and the economy as a whole especially in a market as diverse and complex as India.

This article was first published on LinkedIn by Indrranil Roy Choudhuri

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