05 April 2017 14:41:01 IST

Logistics players eye gains from GST

With new additions to the Bill, post-GST costs are expected to fall significantly for the sector

The Goods and Services Tax (GST) Bill, which is more than a decade-and-a-half old since its conceptualisation, is much closer to reality after the passage of the four Bills in the Lok Sabha.

The Centre passed the four Bills — Central GST, Integrated GST, Compensation to States and Union Territory GST — after making the required amendments following negotiations with the States. Some of the changes made — such as exemption of gifts (goods and services) from employers up to ₹50,000 per annum, and the decision to constitute an authority to check anti-profiteering practices — are expected to nudge companies to pass on the benefits obtained from the GST system to the end customers.

Earlier bottlenecks

Among the several industry players preparing to reap the full benefit from this new-found opportunity are a diverse bunch of logistics companies.

A sizable portion of the benefit is expected to convert into increasing demand from end customers, bringing greater business to the intermediaries — chiefly the logistics and transportation sector. Organised players in this segment should gain substantially when compared to the unorganised businesses.

To start with, the GST Bill is expected to address quite a few bottlenecks. A joint study by Transport Corporation of India and Indian Institute of Management Calcutta indicates (i) an increase in stoppage expense from ₹0.16 per tonne km in 2011-12 to ₹0.28 per tonne km in 2014-15, (ii) An increase in average trip expense and the freight rates per tonne km and (iii) an increase in the average number of stops in 2014-15 vis-à-vis 2011-12.

With the seamless movement of goods expected after the implementation of GST, the costs and the average number of checks and border checks can be reduced significantly.

This high cost of logistics was re-emphasised by the report in ‘Revenue-neutral rate and structure of rates for goods and services tax’. Trucks plying in India cover a distance of 280 km a day compared to 800 km in US. Besides the wage costs of drivers, check points and other official stoppages consume nearly one quarter of total travel time, and consequently add to costs.

With these problems possibly pushed to the background, strong, long-run efficiency gains can be expected once this unified indirect tax system is implemented by July 1, 2017. There will be far fewer hold-ups at the State borders, enabling a seamless movement of goods.

The supply chain for the logistics industry, especially in the containerisation and warehousing segment, is expected to gain considerably.

Warehousing, containerisation

Goods incur a 2 per cent Central sales tax, when manufactured in one State and sold in another directly. To avoid this, manufacturers build many small warehouses across states to move their final goods there before the final sale in the State. With GST being implemented and Central sales tax no longer applicable, companies are expected to consolidate the several small warehouses into a single large one at an optimal location, facilitating economies of scale, reducing variable costs, increasing automation and improving operational efficiency. The delivery of goods from this centralised warehouse is expected to happen through a hub and spoke model.

This should help companies such as Transport Corporation of India (TCI), VRL Logistics and GATI. For instance, TCI is in the process of building GST-ready warehouses across four locations (Nagpur – 1.65 lakh sq ft, Hyderabad – one lakh sq ft, Chennai – 45,000 sq ft and NCR – 2.5 lakh sq ft).

Demand for heavy vehicles

Similarly, the container market is also expected to see a strong positive impact. With containerised transportation increasingly gaining strength and expected to double over the next half a decade, major domestic freight players, such as AllCargo Logistics, Navkar Corporation and Container Corporation of India (Concor) should be big beneficiaries. Besides, large centralised storage hubs and full truck-loads to these locations from the manufacturing plants should increase the demand for heavy commercial vehicles too.

Also, AllCargo Logistics — with a land bank of over 200 acres and a presence in coastal shipping — is likely to make use of coastal shipping operations to leverage the gains from GST. Similarly, Navkar Corporation and Concor, which boast strong connectivity to container freight stations, inland container depot, logistics parks and industrial clusters, should benefit too.

Besides, these logistics players will get a strong boost once the Centre starts implementing its project on coastal waterways (Sagarmala) and the companies begin to develop multi-modal infrastructure efficiently.