Thursday 8 June 2017

GST- Impact on Transportation

A shift to the organised logistics sector, consolidation of warehouses, lower logistics cost and boost to express cargo operators – rating agency ICRA expects all these changes once the Goods and Services Tax (GST) regime kicks in.
To understand the impact of GST on the logistics sector, BloombergQuint, in its special GST Countdown series, spoke with Subrata Ray, senior group vice-president at ICRA.
A report, authored by you, makes the case that GST will trigger a shift to the organised logistics sector. Why do you say that?
Today, the logistics segment is highly fragmented. The primary use of logistics is from the manufacturing sector. First, the goods are sent to warehouses, from warehouses goods go to smaller distributors, and then eventually to the end retailer. The logic of setting warehouses today depends on both the demand aspect as well as the taxation aspect. Because if you are setting up warehouses in a single city, as you transfer the goods to another state, you have to pay additional central sales tax (CST) of 2 percent.
Currently there is a 2 percent CST applicable for inter-state supply but if a company sets up a warehouse in each state, CST isn’t applicable as transfers between inter-state warehouses are treated as stock transfers,,
Yes, exactly. So today the major incentive for setting up multiple warehouses across locations, across demand centres is to ensure that you don’t end up paying higher taxes. But post GST as this transfer tax gets subsumed in the overall GST, the economic logic will come into play. We don’t expect consolidation to happen immediately, but over a period of time we expect the number of warehouses to come down. We will have bigger warehouses in a more centralised location. The location of the warehouse will be decided purely by economic considerations and the number of warehouses will come down.
Can you illustrate how the logistics of transporting goods will change once GST kicks in?
In the pre-GST regime, if a manufacturer is located in one state, he sets up warehouses in multiple locations in each state; at least definitely in various geographies - central, western, north and south, and also in maybe multiple other states. Now the goods are transported by the manufacturers to warehouses and then from warehouses to distributors and retailers further down. Typically, the transportation would happen through a full truckload system from the manufacturer to warehouses, and then from warehouses to distributors and retailers in less than truckload format by the subsequent transportation house.
Post the implementation of GST, we expect the number of warehouses to get consolidated eventually to one or two large warehouses. So the number of warehouses will come down. At the same time, the quantum of goods that is getting transported will increase significantly. So, a single warehouse will handle a larger quantum of input. So effectively, you’ll have much bigger trucks and possibly carrying over a longer distance between manufacturer to warehouses. So, we will see higher tonnage trucks being used and we will also see operating efficiencies coming in from scale economics.
From warehouses to distributors and retailers, the chain will become wider because now from a single warehouse, the goods will get distributed to many distributors. So this segment can be handled depending on the type of goods or the nature of goods by less than truckload or full truckload; distributor to retailer would be obviously less than truckload format.
How is this choice of full truckload and less than truckload made by manufacturers and how will it change post GST?
Ideally, trucks would like to operate in a full truckload mode. Basically, use the full truck capacity between one location to another because that helps you achieve efficiency.
So transport more goods in a single trip?
Yes, but when you are transferring fewer goods, it is not possible to get full truckload. So you’ll be typically using a smaller truck. But even then, it’ll be a less than truckload situation. So, you’ll be transferring truckload, smaller lots, less than truckload between shorter distances. Post GST, the manufacturer to warehouse transportation will get consolidated and the tonnage segment will go up significantly.
How is it different from what happens today?
Today, there are multiple warehouses. So, there was distribution of load. In various product categories, one was not able to use very large capacity trucks. And secondly even the distances were smaller. Larger trucks typically give the best operating efficiency when you operate over a longer distance and carry the maximum quantity of goods.
 What factors will determine warehousing strategy of companies?
The warehouse locations now would be entirely decided by nature of goods, distance from manufacturing plant and economics. We believe there will be a lot more investment in technology. So, you will have larger trucks operating. You will also see that the warehouses will get consolidated. Warehouses will use greater amount of technology in terms of labelling, tracking and other activities. Also, there will be investment in cold chains. So, we expect investment in the logistics segment to move up the value chain and a greater degree of investment in technology.
How will GST impact express cargo operators, given that tax treatment wise, they will be at par with Goods Transport Agencies or GTAs?
Currently, there is some difference in terms of taxation. Express cargo operators end up incurring a higher tax rate (15 percent) because of lack of abatement (compared to GTAs at 4.5 percent) . But now, with the input tax credit coming in, the difference will go. So effectively, under GST, the GTA operators and express cargo operators will have the same tax incidence of 5 percent.
The other aspect of GST that is likely to make transportation of goods efficient is e-way bills. Do you see any challenges in this process?
One of the biggest operating inefficiencies that creep into logistics is because of check posts. At every check post, if a good is transported between from say Delhi to Chennai, it has to go across multiple check posts and at each check post, there is time spent in clearing goods. The estimate is that the time wasted could be in the range of 20-30 percent. The expectation is that post GST, since number of the state level taxes will come down, the requirement to do border checks will come down too. Additionally, if the e-bill is used properly, in terms of proper digitisation, the time spent at check posts can come down significantly.
However, there are question marks on operational aspects because the requirement of having check posts or having physical checks hasn’t totally gone away even under GST. So, we have to actually see how it pans out in the implementation phase and if during implementation the actual amount of time spent at check posts continues to be the same, the advantages of introducing GST will be reduced significantly.
What could be some of the implementation challenges?
In each e-way bill there will be multiple points which would need to be checked. One is, that at every check post, the person who is checking may not be fully qualified or fully experienced in doing those checks. So if you’re doing a manual check, it may take a lot of time. Two, sometimes there may be trivial variations in the manual entry; so those trivial variations may lead to a hold up or may lead to, as in the past, people paying bribes to get through the check posts. I think the government needs to address such issues. You will have to train the people on the ground on how to use the new system in terms of checking because in the initial months, probably, people may continue to use existing systems.
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