- GST impact on Logistics Industry
The impact of G S T (Goods and Service Tax) on the overall operations in their sectors. GST is just a tipping point from what we see in the market as other governmental interventions .
We started discussing on the impact in Logistics industry. The impact or rather the opportunity is huge for both them 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.
Just looking at the stats in terms of volumes that need to be managed signifies the huge potential for both Logistics companies and their customers as well to tap new markets.It is no surprise the industry is quite upbeat about it. The opportunity to reduce costs by realigning supply chain is immense.
- Benefits Of G .S. T
The current tax structure is quite complex - there are central level taxes in form of excise, customs duty and CST, and then there are varying state level taxes in form of VAT and other levies like Octroi, state level cess etc.
The problem is that, state level taxes are applicable on top of central taxes. Which means the manufacturer/supplier is paying taxes on taxes. Only way to avoid this multi tax scenario is to create a stock transfer between inventory stocking points within states!
Hence, most industries - like manufacturing/third party logistics players - generally have warehouses/offices in each state to reduce tax burden of Central Service Tax(CST). Thus, planning is more driven by logic of saving taxes, rather than achieving operational efficiency.
Any large LSP, manufacturer or CPG player hence 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. For some manufacturers/CPG corporate with countrywide operations, we have seen the number of warehouses as high as 55-60. Adding to this inefficiency is the fragmented structure in Indian Logistics industry which results in extreme competition.
With such cost structures, and margins less than 5% on turnover of few millions, implementation of ERP/technology at multiple warehouses is costly affair. Hence, most small to medium businesses in this space have stayed away from technology implementations that can result in long term profits. In any case, with smaller warehouses, the automation will not yield great benefits; hence most of the warehouses are semi automated or completely manual. Labour in India is still quite cheap, and considering SLAs are not that strict - the efficiencies are generally compromised. You cannot really fault them, can you? After all, the competition is so intense, that the purse strings are already very tight.
This impact of inefficiency and cost burden is passed to end consumer, either in terms of quality/SLAs or/and in terms of cost.
With GST coming in, the key advantage will be re-aligning/merger of the smaller warehouses to most productive and logical locations - without having a tax burden to think of, which when automated will give excellent cost benefits.
With government all geared up to release the GST regime, the businesses also need to plan accordingly. 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. With so much focus on existing operations, it will be almost difficult for the management of these businesses to plan for revamping. Hence, best way would be to look at external experts to provide the guidance. What they may also want to look at is outsource to LSP who have planned for post GST regime. It is quite obvious that LSPs, who can adapt the changes due to GST will be at higher advantage to others.
All in all, the post GST regime should provide exciting times for logistics - and particularly so for 3PL/Warehousing industries.
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