GST impact on the logistics sector: 

GST impact on the logistics sector: 

Context:

Goods and services tax (GST), could affect profitability of the logistics sector in the short run, but operational efficiency is bound to improve in the long run

Introduction:

•  The logistics sector attracts GST rate of 18%, up from 15% in the previous tax regime.

Logistic sector components:

•  The logistics sector comprises the road transport sector (consisting of unorganized small businesses, trucking, fleets and large transport companies), the storage and warehousing sector and third-party logistics (3PL).
•  These can be further classified into big and small players and asset heavy/light companies.

Key performance measures:

•  Profit after tax (PAT) as percentage of income and profit before interest, taxes, depreciation and amortization (PBITDA) as percentage of income.
•   Between 2010 and 2015, PAT has declined for all sub sectors and shows volatility for the logistics and the storage sector.
•     PBITDA is an important measure that reflects operating efficiency and ranges between a low of 7% for the road transport sector to a high of approximately 20% for the storage sector.

What ails logistics?

•  Operational efficiency could have been falling for a variety of reasons, heavily affecting overall transportation costs as the logistics sector has been traditionally beset with several problems.
• This includes complicated networks, increasing coordination costs across the supply chain coupled with deficient infrastructure, entry taxes and poor vehicle-load-carrying capacities, resulting in delays and damages.
• The myriad number of taxes had made logistics a cumbersome and costly process.

Way ahead:

• For manufacturers, the goods and services tax (GST) has now replaced the multiple state VATs and the need to have a hub across all states will cease to exist.
• This will allow firms to redesign supply chains and centralize hub operations to take advantage of scale economies.
• It will also allow firms to employ efficient practices such as bulk-breaking and cross-docking from a central location.
•  Already, Nagpur, India’s “zero mile city”, is looking to become the “nation’s warehouse” and is witnessing increased investment from retailers and warehouse companies betting on GST transforming the nation’s logistics space.

GST and its impacts:

•  Under GST, the tax on warehouse, storage and other labour services has increased from 15% to 18%.
•    So a third-party logistics provider will now have more incentive to move towards the provision of services that have a high degree of value addition and where input tax credit can be claimed.
•  This can result in consolidation in the storage and warehouse sector.
•   GST will bring a lot of alignment of value-added services in the logistics sector .
• This will make way for cutting-edge investments and mergers and one will see a phenomenal increase in asset utilization and increase in operational efficiency
•   There will be new investment opportunities for technology-enabled mini warehouses along the highways and the sector will witness a fresh wave of technology enabled start-ups.
• While GST won’t solve many intrinsic problems of India’s transport network, it could reduce the logistics costs of companies producing non-bulk goods by as much as 20%, according to an estimate by Crisil Ltd
• The impact and overall cost benefits of GST will additionally vary widely across industries.