How GST Impacts the Logistics and Supply Chain Industry in India?

Rajath Kumar

With the implementation of the Goods and Services Tax (GST) from 01 July 2017, business units across the country are beginning to feel its impact. Since the GST has subsumed all other taxes, such as service tax, VAT, Octroi, excise duty etc. collected by the central and state governments in India, the reforms are extensive. Their impact too is comprehensive and is expected to continue well into the future.

Like all other industries in India, GST impact on logistics and supply chain will also bring some major changes in the way these domains operate, as well as their bookkeeping activities. Logistics is a small but major part of supply chain management that concerns the administration of goods distribution in an efficient manner. We will therefore initially look at the effect of GST on logistics and then see how it impacts the broader domain of supply chain management.

The logistics industry includes the road transport sector (comprising unorganised and small enterprises, trucking companies and other fleets), the storage and warehousing domain and the third-party logistics. The operational efficiency of this industry had been falling due to the complexity of networks, growing coordination costs across supply chains, inadequate infrastructure and the levying of entry fee in different states. In addition to these, the multitude of business taxes was making logistics management an unwieldy and expensive process.

Most firms had to establish hubs and transit points in several states to avoid the state value added tax (VAT) because the goods directly supplied to dealers were taxed as per the VAT rate, but the transfer from the warehouse was treated as a stock transfer and did not attract VAT. However, this only caused more problems in accounting and lack of clarity for companies, while also resulting in opportunities for tax evasion.

GST for logistics companies 

With GST now having replaced the multiple state taxes, there is no longer the long-prevalent need to install a hub across all states. Companies can remodel their supply chains and consolidate their hub operations to benefit from large-scale operations. It will also help them to use efficient practices like bulk breaking and cross-docking through a centralised location.

Under GST, the tax on warehouse and services involving manual labour has increased to 18% from the previous tax rate of 15%. With this change, a third-party logistics company will have greater incentive to provide services where the degree of value addition is high and where input tax credit can be claimed. This, in turn, will help in the consolidation of storage and warehouse sector.

With the convenience of entry across states by measures like the e-way bill, transportation delays will be reduced, although it will also call for streamlined IT systems and readily usable documentation at the entry points. For the third-party logistics companies, the costs of designing a logistics network will be less, and asset-light firms will be able to adapt quickly and reap more advantages in comparison to asset-heavy firms.

Impact of GST on supply chain

Before we look at the GST impact on supply chain, it must be understood that supply chain management is vital for the running of business organisations producing and distributing merchandise. Each business has standards for inventory turnaround, and these must be diligently adhered to in order to ensure optimum profit for the organisation. A loss of inventory at any point will result in a loss of value.

Post the implementation of GST, the benefits accrued by entities in supply chain management mechanism include:

Customisation of supply chain – Under GST, manufacturers can shift towards tailored supply chain models as per customer requirements. The removal of stock transfer benefits can help in increasing the share of direct dispatches for medium and large-sized dealerships.

Superior inventory management – After the elimination of multiple state-level taxes in lieu of a uniform GST rate, the stock points have been optimised and channel inventories reduced. There will be fewer transit stays after GST, which will help in advancing lead times while also reducing inventory levels at stocking points. With more potential for consolidation, warehouse management can also become more efficient.

Tangential decrease in incoming logistics costs – An impact of GST on supply chain will also be seen in the form of tangential benefits for direct out-of-state procurements and logistics costs. This can help manufacturers to expand their vendor base outside state boundaries and alter the sourcing models profitably.

Cash flow management for export businesses – Due to GST, tax exclusion benefits will continue with minimum effect on the bottom line, and a streamlined tax system will help in promoting more exports.

Modified after-sales distribution models- Implementation of GST can significantly affect the spares market due to an increased need for storage and retail penetration. Forward-looking businesses can develop their distribution footprint to retreat from consignment stocking, and enable customised supply chain models while also offering high-quality service at lower costs.

Overall, the logistics and supply chain management industry has been touted as one of the primary beneficiaries of GST structure. To begin with, there will be more compliance and adjustment costs because the frequency of filing returns has increased for businesses. Further, to claim the input tax credit, compliance will be expected from every single party across the value chain. This may hurt the profitability of the industry in the short run, but in the long run, operational efficiency is bound to enhance.

At Capital Float, we take all steps to ensure that small and medium enterprises do not face any hurdles in procuring loans for their business expansion or to implement the changes that need to be implemented as a result of GST. We are also helping our clients – which include logistics and supply chain firms – to comprehend the clauses of GST and use it to maximum advantage in their operations. Read our dedicated GST blog series to know more about the implications of GST on various sectors.