After debating for more than half a decade, India’s Goods and Services Tax (GST) Bill has been passed and is set to come into force on 1 July 2017.
Regarded as a game-changer, GST will revolutionise the way the country does business. The indirect uniform tax will optimise production, inventory and distribution nationally; and change the way industries, logistics and supply chains operate.
The implementation of GST will benefit logistics companies as there will be a change in warehouse locations, and consequently the distribution of goods. Currently, warehouses have been set up to avoid state taxes at the cost of operational efficiencies. State taxes are levied at different rates across all 29 states, meaning a truck driver delivering a consignment across multiple state boundaries would be subject to taxes each time a border is crossed.
Vivek Ganguly, Investment Director of Nine River Capital, an investment banking firm, told The Hindu Business Line, “Because of entry taxes, local body taxes, Octroi and other hurdles, trucks are sitting idle 30% to 40% during their delivery schedule. When you remove these barriers, you will have less downtime for vehicles, which effectively means companies would need fewer vehicles for carrying out the same business.” Reduced border checks and paperwork are expected to cut transportation cost by 20-30% when GST is introduced.
A fixed GST rate of between 18% and 22%, coupled with the virtual elimination of state boundaries, may see smaller warehouses consolidated into larger ones. Manufacturers and third party logistics providers are expected to adopt a hub-and-spoke service delivery model, distributing products from a large centralised warehouse to surrounding states. Connectivity of these warehouses to consumption centres will also improve the development of multi-modal transportation systems.
The Transport Corporation of India is currently building large warehouses in four key cities – Chennai, 45,000 sq ft; Delhi, 250,000 sq ft; Hyderabad, 100,000 sq ft and Nagpur, 165,000 sq ft.
Some in India say that the GST is a landmark reform and expect that it will provide a framework for businesses to operate more efficiently, citing reduced transportation lead times and warehouse consolidation as factors.
GST has proven to be an effective tax collection method across countries such as Canada, France, and the UK, and has contributed significantly to the growth of these nations. With India taking the same route, GST is likely to rocket-fuel the Indian economy.