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3 ways GST will dramatically simplify logistics in India

3 ways GST will dramatically simplify logistics in India

India’s recent tax reforms introduced a transformative Goods and Services Tax. According to Deloitte, India will join 160 countries around the world that have instituted a nationwide value-added tax.  

What is the GST?

“Even if it retains a few flaws, the GST will be far simpler than the thicket of taxes, surcharges and cesses it will replace” – The Economist

India passed the Goods and Services Tax (GST) in August 2016, after a decade long battle to win over competing factions across State and Federal governments. The complex tax overhaul aims to fiscally unite a $2 trillion economy of 1 billion consumers operating 9 million businesses across 29 states. The reform will subsume an outdated patchwork of at least ten federal, state and local taxes that charged products or services multiple times as consignment modules changed hands or crossed state lines.

There are compounding constraints of multilayered taxes that bottleneck Indian logistics – duplicate charges, corruption and delays. The GST could systematically resolve each of these constraints over time.

1. Single market & removal of double taxation The cost of duplication and corruption

GST creates “a seamless national common market for our farmers, artisans and entrepreneurs” as India’s Congress Party originally hoped, and the Modi government has finally moved into effect.

Despite evident complexities and challenges, most experts believe the GST will simplify the movement of goods and services across India and boost productivity.

“Logistics companies stand to be among the biggest winners as it becomes easier to ferry goods across India…” – Bloomberg

A research paper published by the U.S. Federal Reserve (Van Leemput, A. Wiencek, 2017), calculates the total tax applied to transporting goods from Andhra Pradesh to Maharashtra was 117%. Of this, the final tax on manufacturing goods travelling between these states was 48 percent. Therefore, trade barriers or  “inefficiencies associated with compounding taxes” under India’s previous tax system accounted for 47% of the total cost to transport goods from Andhra Pradesh to Maharashtra.

To avoid high taxes, manufacturers and distributors chose to operate in states that offered tax breaks or sops. Similarly, distribution channels and warehouse management companies confined themselves to low-levy zones. The GST will lift these inefficient restrictions, permitting manufacturing areas, distribution channels and warehousing firms to spread across the country in a logistically-logical and strategic manner.

2. Reduction in delays

Bloomberg (March 2017) estimates that “more than 20,000 truck drivers wait in queues up to three kilometres long to pay an entry fee at 122 New Delhi checkpoints”. In a 2009 survey quoted by the Economist,  the Transport Corporation of India and the Indian Institute of Management, Kolkata observed that a lorry could waste 32 hours at various checkpoints en route from Kolkata to Mumbai.

The GST will assuage each of these impediments. First, the tax will be implemented in 4 flat brackets – 5%, 12%, 18% and 28% with a majority of goods and services expected to fall within the 12-18% box. Second, the levy will apply only at the final point of consumption, thus unifying tax levels and streamlining payments to

  • cross-reference state taxes and eliminate redundancies
  • curb opportunities for corruption and
  • reduce border checkpoint delays by 50%

3. Increased competition resulting in increased technology & process optimisation

Higher margins and lower barriers to entry will also increase competition, creating better quality products and services over time. Although switching to the new system will require companies to incur a one-time cost and cause temporary market fluctuations,  the benefits of uniting Asia’s third largest economy under one common market will bolster not only the logistics of domestic trade but elevate the ease of doing business across the board, thus, better positioning India to compete with global markets.

With reduced information asymmetry and reduced regional ‘home-ground’ advantages, logistics companies including fleet operators, forwarders, 3PLs and online freight marketplaces, will push for increased technology utilisation. With technology, utilisation comes process standardisation, as companies move to use third party software that can be implemented faster than building in-house.

Together, these improvements will increase internal trade by 29% and boost real GDP by up to 4.2% or $93 billion (Van Leemput, A. Wiencek, 2017).

Numadic builds software and hardware that undisrupts Indian logistics across the supply chain. To learn more about how we can help you with your logistics operations, simply fill out our demo request form here.

 

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