18 August 2016 14:43:51 IST

GST Bill: No magic pill for logistics

Nalgonda (Telangana) 18/01/2014 Road 
 Vehicular flow on NH-65 is at its high since people are heading towards Hyderabad after celebrating Sankranthi at their home at Panthangi toll plaza in Nalgonda district on Sunday. 
 . Photo:Singam Venkataramana

While it is beneficial at a macro-level, it is unclear how much of the gains will flow to logistics companies

The rollout of the Goods and Services Tax (GST) is expected to be a game-changer for the logistics sector, which accounts for nearly 7 per cent of the country’s GDP. A report by Care Ratings notes that the GST rollout can add 100-200 bps to the GDP, thanks primarily to the faster and cheaper movement of goods. For one, logistics costs in India are high as compared with countries such as the US and China. For instance, according to a report from ISID, freight ratesin the US and China are 51 and 58 per cent, respectively, of the Indian rates after adjusting for Purchasing Power Parity. .

The costs in India are high due to various issues in the current system, and GST is expected to address these in at least two ways. Also, the goods transport industry is dominated by unorganised players, and the fragmented market creates inefficiencies. The post-GST era is likely to see more consolidation in the market, and thus improved efficiencies.

But, while the long-term effect of the new taxation regime is overall positive for the sector, the near-term impact can create some uncertainties. Here is how:

Toll delays

One of the main benefits of GST is the anticipated reduction in delays faced by transport vehicles at the State border check-posts. Consider the truck moving goods from Namakkal to New Delhi. As the vehicle moves through various States, entry tax, local body tax and Octroi have to be paid. These rates vary across States for the same goods.

Due to these complexities in the tax structure, tax collection is slow and leads to long queues and wasted time. A report by the Ministry of Road Transport and Highways notes that 16 per cent of the goods travel time is spent at check-posts. So, in a given time, vehicles in India are able to cover only half the distance covered by their global peers — average annual distance of Indian trucks is 85,000 km, compared with over 150,000 km by those in developed countries.

Also, long waits at check-posts leads to trucks idling for an estimated 30-40 per cent of the day. Waiting increases fuel loss and labour charges, increasing overall transport costs. World Bank estimates that about 40 per cent of logistics costs are incurred at check-posts and toll plazas. Nomura says that cutting wait time in half would add 8 per cent in truck capacity.

The new GST regime will likely eliminate delays at State borders, improving truck utilisation and fuel efficiency. This can raise the profitability of the sector, which operates on very thin margin, of under 5 per cent.

While this is the best case, it is likely that only some of the delays may be reduced, and full efficiency may not materialise. One, border checks may not be eliminated due to security and other considerations. Two, toll plazas also create queues and delays, slowing down truck movement, and these are not addressed by GST. Three, the road infrastructure needs to improve so that larger trucks can travel in a fuel-efficient way over long distances. So, we may not see transport costs come down too much.

Warehouse consolidation

GST will also help improve efficiency in warehouses as multiple smaller and distributed warehouses are consolidated into larger ones. Currently, warehouse locations are decided with an eye on optimising taxes. For instance, a manufacturer or logistics service provider may have over 25 small warehouses — a facility in every State it operates in — for tax reasons.

For operating efficiencies however, cutting it to one-fourth would be ideal. Inventory management, for example, is difficult in small distributed warehouses. Also, implementing technology such as Enterprise Resource Management (ERP) software or automation is not feasible, or may be too expensive, if the facility is not large. Manual processes and sub-optimal operations lead to higher operating costs, thereby eroding margins.

With GST, tax will be collected across the value chain — Central Goods and Services Tax (CGST) by the Centre, and State Goods and Services Tax (SGST) on transactions within the State. For inter-State and imports, IGST (Inter-State Goods and Services Tax), which is made up of two components, CGST and SGST, would apply. So, manufacturers and logistics service providers can pick their locations based on their operational considerations. These optimisations can reduce logistic costs by 1.5-2 per cent of sales, as per Care Ratings.

While the long-term profit prospects of consolidation may be good, there could be a lot of uncertainties in the short term. Smaller players, who have more localised operations, may not be able to cope with the changed landscape. Larger players also need to invest in facilities and technology to be competitive. Setting up large logistics parks may bring about its own set of challenges and capital requirement. The sector may see some churn and new winners, with a larger scale of operations, may emerge.

Sober stocks

So even as Care Ratings estimates that logistics costs can come down by 20 per cent with GST rollout, logistics stocks have not reacted positively to the passing of the GST Bill. This could be due to three reasons.

One, GST roll-out was perhaps priced in for many of the stocks. In the last six months, logistics companies such as Transport Corporation of India, Snowman Logistics and Gati saw their stock prices nearly double.

Two, the actual implementation of GST may take a while to unfold, and there are still uncertainties to iron out. Due to these likely delays, the market may be discounting the benefits.

And finally, while logistics costs will fall for the economy, service providers may see their costs increase due to the additional capital expenses and changes that they need to put in place. So, while there are benefits at the macro level, it is unclear how much of the gains will flow to logistics companies.