A PROJECT

ON

“GST AND ITS IMPACT ON LOGISTICS AND SUPPLY CHAIN”

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EXECUTIVE SUMMARY

GST has been the preferred mode of taxation of goods and services and has been introduced in

more than 140 countries. Most countries have single GST rate, however some countries like

Canada & Brazil has dual GST structure. White paper proposes dual structure for GST in India.

Standard GST rate in most countries vary between 15-25%. The proposed GST structure in India

proposes dual structure. GST shall have two components- Central GST and State GST. The

model shall be implemented by multiple statutes- one for Central GST and SGST statute for

every state. However, it is proposed that basic feature of laws related to chargeability of tax,

definition of taxable event, taxable person, basis of classification, basis of value for chargeability

of tax shall remain uniform. Further, to an extent uniform procedure for collection of both

Central GST and State GST shall be prescribed. Existing central excise/sales tax concession

scheme in the specified area is likely to continue. Various schemes if needed shall be converted

into cash refund scheme so that chain on input tax credit is not disturbed. Rate of GST shall be

prescribed in due course of time. It is expected to be revenue neutral. Threshold limit proposed

for Central GST is 1.5 crores and State GST is 10 lakhs. Further a compounding scheme for state

GST is being proposed for turnover upto 50 lakhs. To implement the model, various legislative

changes and constitutional amendment shall be required. It is expected that draft Central GST

Act may be released in course of a few weeks. The proposed GST will have a great impact on

Logistics and Supply Chain of the industries, the simplification and the introduction of a uniform

tax structure across states in India would mean that manufactures will now base their logistics

and supply chain based decisions on operational efficiency instead of tax optimization.

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INTRODUCTION

GOODS AND SERVICE TAX (GST)

Goods and Services Tax (GST) is a broad based, single, comprehensive tax levied on goods and

services consumed in an economy. GST is levied at every stage of the production-distribution

chain with applicable set-offs in respect of the tax remitted at previous stages. It is basically a tax

on final consumption. To put at a single place, GST may be defined as a tax on goods and

services, which is levied at each point of sale or provision of service, in which, at the time of sale

of goods or providing the services, the seller or service provider may claim the input credit of tax

which he has paid while purchasing the goods or procuring the service.

It will evade the cascading effect in Indirect tax regime. For instance, when an Auto part making

company produces auto parts, the central Government charges an excise duty on them as they

leave the factory. Whereas on lower end of the supply chain i.e. at the retail level. VAT is

charged without giving credit of the excise duty levied earlier. But in GST system, both central

and state taxes will be collected at the point of sale. Both components will be charged on the

manufacturing cost, it will result in increased tax collections due to wider tax base and better

conformity.

GLOBAL DEMAND OF A TAX SYSTEM 

Only honest tax payers pay regular taxes whereas the offenders still walk escort free. The idea to

bring GST is to make a chain which is difficult to break and base of tax collections may widen,

so that at lower rates better revenue may be garnered.

When an MNC wants to do business in India it finds new laws in each State. Not only that but

they find so many laws applicable on them that find it impossible to work with such a country

like India and they reroute to some other neighboring country like China. Therefore, it is almost

imperative now to enter in the era of GST.  

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DOUBLE TAXATION 

The GST will make no differentiation between Good and Services as the GST is levied at each

stage in the supply chain. The problem of double taxation was addressed by the Supreme Court

of India in the landmark decision of BSNL Vs UOI (2006 (3) SCC-1). The Supreme Court had

held that the same activity cannot be regarded as both goods and services and hence both service

tax and VST should not be applicable on the same set of transaction. However, inspite of the

ruling in the BSNL case, there has been a lot of confusion whether to treat specified activities as

goods or services. Implementation of GST will resolve the dilemma of a large number of

assesses.

JUSTIFICATION IN IMPLEMENTATION OF GST  

Inspite of the success of VAT at large there are still some shortcomings both in the Central and

State level. In the existing State-level VAT Structure there are also certain shortcomings There

are, for instance, even now several taxes which are in the nature of indirect tax on goods and

services, such as Entry Tax , luxury tax, entertainment tax etc., are yet not subsumed in the VAT

scheme . At present the Central Government is charging Central Excise Duty at the point of

removable of goods from the place of manufacture. The Central Excise Duty is to be deposited

irrespective of payment against goods removed from the place of manufacture. Service tax is

charged on the date of rendition of services or the date of receipt of payment whichever is earlier.

The State VAT if chargeable at the time of sale of goods irrespective of receipt of payment

against such sale. The introduction of GST will be a solution to it. GST would be chargeable on

each transaction like sale of goods, incorporation of goods in an individual contract, hiring

equipment, lease paid, and consultation fee paid rendition of any service or may be a transfer of

immovable property etc.

The introduction of unified GST would bring VAT in its true sense. Presently the VAT system,

basically can be called un-integrated GST, in the sense that at present goods and services are

taxed separately.

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GST MODELS

Single GST Model

Under this system there would be single Union GST from each transaction which may comprise

sale of goods or rendition of services. Such transactions would be inter-State VATable. Each

intermediary from production level to consumer level shall pay GST on the value addition after

setting off input tax credit out of charged by it. 

Dual GST Model

The JWC laid down various recommendation including to have two GST components viz.

Central tax and single uniform state tax across the country, levying of a tax over and above GST

by the states on tobacco, petroleum and liquor, GST with a quadruple tax structure comprising of

a central tax on goods extending up to retail level, a central tax on goods extending up to the

retail level, a central service tax, state VAT on goods, and a state VAT on services. Further it

recommended that because of quadruple structure, there may be at least four rate categories one

for each of the components given above. In this system the taxpayer may be required to calculate

tax liability separately for the different rates of tax.

The states must tax intra-state services while inter-state services must remain with the

centre.

Petroleum products, including crude, high speed diesel and petrol, may remain outside

the ambit of GST.

Central cess like education and oil cess may be kept outside the dual GST structure to be

introduced from April 2010.

Levies like the toll tax, environment tax and road tax to be kept outside the GST ambit, as

these are user charges; and

That the levies which are in the nature of user chargers and royalty for use of minerals

must be kept out of the purview of the proposed tax.

 

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GST MECHANISM 

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the supply of

goods or services. 

The taxable event under GST system will be the “supply of goods” and the “supply of services”.

The current taxable event such as “manufacture”, “sale of goods” “render of services” will not be

relevant under GST system.

The prices of commodities are expected to come down in the long run as dealers pass on the

benefits of reduced tax incidence to consumers by slashing the prices of goods. Being

consumption based tax; dual GST will result in better revenue collection for states with higher

consumption of goods and services. This is been explained with an example. (Assuming CSGT

at 10% and SGST at 10%) 

(A) Goods-Producer to Whole-Seller Under VAT (Rs.)

 

Under GST (Rs.)

 

Cost of Production 100000/- 100000/-

Add: Producers margin of profit 20000/- 20000/-

Producers basic price 120000/- 120000/-

Add: Central Excise duty @ 8%

Add: Service Tax @ 10% on Transportation

& Job work paid

8000/-

4000/-

NIL

NIL (Included in

GST)

 

Add: Value Added Tax @ 12.5% 16500/- NIL

Add: Central GST @ 10% NIL 12000/-

Add: State GST @ 10% NIL 12000/-

Total Price 148500/- 144000/-

(B) Goods –Whole-Seller to Retailer

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Cost of goods to the Whole-seller 132000/- 120000/-

Add: Profit margin @ 10% 13200/- 12000/-

Total 145200/- 132000/-

Add: Value Added Tax @ 12.5% 1650/- NIL

Add: Central GST @ 10% NIL 1200/-

Add: State GST @ 10% NIL 1200/-

(C) Goods-Retailer to Final Consumer    

Cost of goods to the Retailer 145200/- 132000/-

Add: Profit margin @ 20% 29040/- 26400/-

Total 174240/- 158400/-

Add: Value Added Tax @ 12.5% 3630/- NIL

Add: Central GST @ 10% NIL 2640/-

Add: State GST @ 10% NIL 2640/-

Total Price to the final Consumer 177870/- 163680/-

Tax component in price to Final

Consumer21780/- 31680/-

Final Price ex-taxes 156090/- 132000/-

It is evident from the above example that due to multiplicity of taxes and due to non-availability

of input tax credit across the board the final price to the consumer is much higher not only due to

tax component but due to cascading affect also.

The mechanics for levy of IGST are as follows:

The Centre will levy an  IGST (rated at the combined Central GST plus State GST rates)

on all inter-state transactions of goods and/or  services with ‘appropriate provisions’ to be

made for consignment or stock transfer of goods;

Inter-state seller would levy the IGST on inter-state transactions involving sale of  goods

and/or provision of services;

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While discharging the output IGST liability, the inter-state seller would be allowed to

utilize input tax credit of IGST, Central GST and State GST.

Seller State to transfer to the Central Government, amount of State GST credit utilized by

the inter-state seller to discharge output IGST liability in that State.

Inter-state purchaser would claim the input tax credit of such IGST while discharging his

output liability.

Central Government would accordingly transfer the amount of IGST used in payment of

State GST to the account of Purchasing State; and

Central agency to act as clearing house mechanism and be responsible to monitor and

verify credit movements and on the basis thereof inform respective Government to

transfer funds .

Benefits of Dual GST

The Dual GST is expected to be a simple and transparent tax with one or two CGST and

SGST rates.

Applicability of other indirect taxes:

It is proposed that the taxes to be subsumed under CGST will include Central Excise Duty

(CENVAT), Service Tax and Additional Duties of Customs and the Taxes to be subsumed under

the SGST will include value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax,

Luxury Tax, Octroi, Lottery Taxes, Electricity Duty and State Surcharges relating to supply of

goods and services. Specific Cess, Excise duty on tobacco products and State Taxes like taxes on

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items containing alcohol, entertainment tax (local Bodies), entry tax for local bodies and

electricity duty are proposed to be included in GST. 

GST collection model

The GST shall have two components: one levied by the Centre (CGST), and the

other levied by the States (SGST).

In 1st Year: The Centre has proposed a three-rate structure for GST, in line with the

recommendations of the empowered committee of state finance ministers, under

which goods will attract a levy of 20%, services 16% and essential items will be

having a concessional rate of 12%. The levy is proposed to be split evenly between

the states and the Centre.

In 2nd Year: In the second year, the rates are proposed to be lowered to 12% for

essential goods, 18% for others and 16% for services.

In 3rd Year: The GST will eventually move to a single-rate 16% (8% plus 8%)

structure in the third year of its operation

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Taxes to be subsumed under GST

Central Taxes State Taxes

Central excise duty Value Added Tax/ Sales tax

Additional excise duties Entertainment tax (unless it is levied on local

bodies)

Service tax Luxury tax

Excise duty under Medicinal & Toiletries

Preparation Act

Tax on lottery, betting and gambling

Countervailing duties (on imports in lieu of excise

duty)

Entry tax not in lieu of Octroi

Additional duty of Customs (levied on imports in

lieu of value added tax or central sales tax)

State surcharges and cesses in so far as they

relate to supply of goods and services

Surcharges and Cesses  

Threshold limits for levy of GST

The present threshold prescribed in different State VAT Acts below which VAT is not applicable

varies from State to State. A uniform State GST threshold across States is desirable and,

therefore, it is considered that a threshold of gross annual turnover of Rs.10 lakh both for goods

and services for all the States.

Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of

13/15 digits. This would bring the GST PAN-linked system in line.

Gross Annual Turnover Central GST State GST

Goods INR 15 million INR 1 million

Services Yet to decided; however the

threshold may be higher than

INR 1 million

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INR 1 million

Compounding Scheme

The States are also of the view that Composition/ Compounding Scheme, there would be a

compounding cut-off at Rs. 50 lakh of gross annual turn-over and a floor rate of 0.5% across the

States. The scheme would also allow option for GST registration for dealers with turnover below

the compounding cut-off. 

GST Rate Structure

GST is expected to have a dual structure with multiple rates on goods at both the centre and state

level. Officials said the two rates being considered are 8-10% for the lower slab and 16-18% for

the higher slab. In addition states will levy a 1% on precious metals and a list of exempted items.

Tax on items containing Alcohol: Alcoholic beverages would be kept out of the

purview of GST. Sales Tax/VAT can be continued to be levied on alcoholic beverages as

per the existing practice. In case it has been made Vatable by some States, there is no

objection to that. Excise Duty, which is presently being levied by the States, may not be

also affected.

Tax on Tobacco products: Tobacco products would be subjected to GST with ITC.

Centre may be allowed to levy excise duty on tobacco products over and above GST

without ITC.

Tax on Petroleum Products: As far as petroleum products are concerned, it was decided

that the basket of petroleum products, i.e. crude, motor spirit (including ATF) and HSD

would be kept outside GST as is the prevailing practice in India.  

Taxation of Services: Both the Centre and the States will have concurrent power to levy

tax on all goods and services.  

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Cross utilization of credits between goods and services

The taxes will be levied in parallel by the Centre and the States who will levy the CGST and

SGST respectively on each supply of goods/ services. Since the Central GST and State GST are

to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input

tax credit (ITC) for the Central GST and could be utilized only against the payment of Central

GST. The same principle will be applicable for the State GST. A taxpayer or exporter would

have to maintain separate details in books of account for utilization or refund of credit. Further,

the rules for taking and utilization of credit for the Central GST and the State GST would be

aligned. Thus the cross utilization of credits for goods and services would be allowed subject to

the fact that cross utilization of credits between the CGST and SGST would not be permissible.

Taxation of Stock Transfer

The GST regime would work under a destination/ consumption based concept and hence the tax

on inter-state sale transactions will accrue to the Destination State. As a corollary, it will be zero

rated in the Origin State. 

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Inter-State Transactions of Goods and Services

The Empowered Committee has accepted the recommendations of the Working Group of

concerned officials of Central and State Governments for adoption of IGST model for taxation of

inter-State transaction of Goods and Services. The scope of IGST Model is that Centre would

levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and

services with appropriate provision for consignment or stock transfer of goods and services. The

inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST,

and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST

used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his

output tax liability in his own State. The Centre will transfer to the importing State the credit of

IGST used in payment of SGST.  

Single return or multiple returns

It is expected that a single return will be required to be prepared by the assessee and copies filed

with the central GST and State GST authorities.

Process of assessment under the dual GST

The dual GST is expected to be a self assessed tax. The tax administration would have powers to

audit and re-assess the taxpayers on a selective basis.

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Benefits availed presently by EOU's (exemption from excise duty and Central Sales Tax

(CST) on domestic procurement of goods.

CST will be phased out and will have no place in the GST regime. It is expected that the benefits

presently availed by the EOUs by way of exemptions would continue to be available in the GST

regime as well.

Continuation of exemption currently available

After the introduction of GST, the tax exemptions, remissions etc. related to industrial incentives

should be converted, if at all needed, into cash refund schemes after collection of tax, so that the

GST scheme on the basis of a continuous chain of set-offs is not disturbed. Regarding Special

Industrial Area Schemes, it is clarified that such exemptions, remissions etc. would continue up

to legitimate expiry time both for the Centre and the States. Any new exemption, remission etc.

or continuation of earlier exemption, remission etc. would not be allowed. In such cases, the

Central and the State Governments could provide reimbursement after collecting GST.

GST and works contract

Works contract can straddle three taxable activities as per the current law. There is of course

supply of goods. Then due to the very nature of the contract, there is supply of services. Further,

if in the process of completing the works contract a new commodity comes into existence, there

is the taxable event of manufacture. As of now the supply of goods is taxable in the form of

Value Added Tax (VAT), while the services element is taxable as service tax. Hence, different

aspects of the same activity have a potential to be taxed by different statutes.

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Advantages of Implication of GST in India

It will boost up economic unification of India; it will assist in better conformity and

revenue resilience; it will evade the cascading effect in Indirect tax regime.

In GST system, both Central and state taxes will be collected at the point of sale. Both

components (the Central and state GST) will be charged on the manufacturing cost.

It will reduce the tax burden for consumers.

It will result in a simple, transparent and easy tax structure; merging all levies on goods

and services into one GST.

It will bring uniformity in tax rates with only one or two tax rates across the supply chain.

It will result in a good administration of tax structure.

It may broaden the tax base.

It will increase tax collections due to wide coverage of goods and services.

It will result in cost competitiveness of goods and services in Global market.

It will reduce transaction costs for taxpayers through simplified tax compliance.

It will result in increased tax collections due to wider tax base and better conformity.

Single Tax Identification Number (TIN)

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Challenges in the implementation of GST

Integration of a large number of Central & State Taxes – multiplicity of taxes and tax

rates.

How to levy tax on consumptions whether as multi point levy or levy at final

consumptions.

Power to levy and collect taxes – necessary constitutional amendments.

Rationalization of thresholds and exemption limits.

Operating a seamless input credit system – no cascading.

Integrating the origin based tax with the destination based GST.

Standardization of systems and procedures.

Efficacy and integration of broad based computerization across the Nation.

Dispute settlement procedure and machinery.

Training of tax administrators and assesses.

Protecting and balancing the present and future revenues of the Centre and the States.

Safeguarding the interests of less developed States with lower revenue potential.

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Treatment of exemption allowed in excise, VAT, etc.

Treatment of chargeability of Alcohol, tobacco, petroleum products which are likely to

be out of the GST regime.

Various other issues like inter-state transfer of goods cross border taxation of services,

place of taxation, timing of taxation, etc.

DATE OF IMPLEMENTATION OF GST

The Finance Minister at last announced the final date of GST implementation i.e. 1st April 2011

after a meeting with the state ministers on 21st July 2010.

GST GLOBAL SCENARIO

More than 140 countries have introduced GST in some form. It has been a part of the tax

landscape in Europe for the past 50 years and is fast becoming the preferred form of indirect tax

in the Asia Pacific region. It is interesting to note that there are over 40 models of GST currently

in force, each with its own peculiarities. While countries such as Singapore and New Zealand tax

virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30

categories of exemptions. In China, GST applies only to goods and the provision of repairs,

replacement and processing services. It is only recoverable on goods used in the production

process, and GST on fixed assets is not recoverable. There is a separate business tax in the form

of VAT.

For example, when the GST was introduced in New Zealand in 1987, it yielded revenues that

were 45 per cent higher than anticipated, in large part due to improved compliance. It’s more

neutral and efficient structure could yield significant dividends to the economy in increased

output and productivity. The GST in Canada replaced the federal manufacturers’ sales tax which

was then levied at the rate of 13 per cent and was similar in design and structure as the CENVAT

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in India. It is estimated that this replacement resulted in an increase in potential GDP by 1.4 per

cent, consisting of 0.9 per cent increase in national income from higher factor productivity and

0.5 per cent increase from a larger capital stock (due to elimination of tax cascading). The

Canadian experience is suggestive of the potential benefits to the Indian economy. This means

gains of about US$ 15 billion annually. Discounting these flows at a modest 3 per cent per

annum, the present value of the GST works out to about half a trillion dollars. This is indeed a

staggering sum and suggests the need for energetic action to usher the GST regime at an early

date

GST AND ITS IMPACT ON VARIOUS SECTORS 

Impact of GST on Revenue States

GST to reduce Manufacturing cost

Implications of GST on imports & exports

Impact on Auto Industry

Impact on Logistics Sector

GST regime to Realign Firms' Warehousing Needs. 

Impact of GST on Revenue States

GST is a consumption based tax and not origin based. Under GST structure, the tax would be

collected by the states where the goods or services are actually consumed i.e., where the goods

are actually sold and not the goods where it is actually originated. Hence, losses could be heavy

for producing states. In view of the above, the Centre is considering a proposal to compensate

states for any revenue loss. The states have agreed to subsume purchase tax in the GST while the

Centre has said it will look favourably into the state’s request to continue the Central Sales Tax,

which may be renamed as transaction tax, for another two years. The FM also said he would look

into the empowered groups’ request to keep the threshold lower for north-eastern states where

the average threshold at present is between Rs 2 lakh and Rs 5 lakh.

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It is also assured to the states that the compensation for subsuming Purchase Tax on food grains

in GST will be provided along with VAT compensation for the next four years.

The FM has also promised to fully compensate all states for any revenue loss on account of

implementation of GST. He said the Centre would compensate 100% for revenue loss on account

of the CST reduction during 2009-10 and the balance outstanding will be released immediately.

With regard to Central Sales Tax compensation, Mr. Asim Dasgupta (Chairman, Empowered

Committee of State Finance Ministers) said that the finance minister has agreed to give Rs 9,676

crores or about 68 per cent of the total revenue loss to the states.

CST, a levy on inter-state transfer of goods was reduced to 2 per cent from 4 per cent with the

aim of removing it completely at the time of the introduction of GST.

GST to reduce Manufacturing Cost

The proposed Goods and Services Tax (GST) would reduce manufacturing cost and benefit end-

customers, nothing that the Indian manufacturing sector was highly taxed. The elimination of

multiple tax structure at central and State levels would make the sector viable and globally

competitive. “Our manufacturing sector is one of the highest taxed sectors in the world. Even a

two per cent reduction in production cost will increase profits by over 20 percent, giving

headroom for reducing prices and benefiting end-users”.

The GST will be a dual tax with both central and state GST component levied on the same base.

There will be no distinction between goods and services for tax purpose with a common

legislation applicable to both.

Implications of GST on imports & exports

Basic Custom Duty will continue to there under GST system. However, the additional custom

duty in lieu of CVD /Excise and the Special Additional Duty (SAD) in lieu of sales tax/VAT will

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be subsumed in the import GST. The import of services will be subjected to Central GST and

State GST on a reverse charge mechanism. In other words, the GST will be payable by the

Importer on a self declaration basis. Place of supply rules will determine which state will have

the authority to get the tax. However, the taxes so paid will be available as Input Tax Credit and

therefore it would be revenue neutral. Exports, however, will be zero rated, meaning exporters of

goods and services need not pay GST on their exports. GST paid by them on the procurement of

goods and services will be refunded.

Continuing the current stated policy on exports, it has been reiterated that export of goods and

services would be zero-rated i.e. no tax would apply on exports, and the input credit relatable to

such export supplies would be allowed to be used against other domestic liabilities or refunded.

Supply of goods and provision of services, to processing zones in a Special Economic Zone

(‘SEZ’) would be zero rated. Supply of goods and provision of services by a SEZ to Domestic

Tariff Area would however be liable to GST.

Impact on Auto Industry

The Auto Industry is sensitive to the changes in the economy as well as fiscal policy and is

accepted as the barometer of economic well-being of a country. The imminent introduction of

the goods and service tax (GST) replacing central excise duty, service tax, state value added tax

(VAT) and central sales tax (CST) may change the way business is done today.

The Practice in this industry is to sell vehicles to a dealer network that sells as well as services

the vehicles. More than 80% of the sales are generally outside the state of manufacture. The

distribution of the vehicles may be by way of direct sales to dealers, currently subjected to CST

or by stock transfers to depots and stockyards across the country. Both these models entail a tax

cost, which gets embedded in the final price to the customers. The rate of CST cannot be set off

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by the dealer against his VAT liability. Similarly, though stock transfers are not eligible to tax,

state VAT laws provide for retention or reduction of input tax credits.

Currently, stock transfers do not attract any tax (other than the loss of input tax credit in the

exporting state). It is possible GST would be applicable on all ‘supplies' including stock

transfers. This would have its own challenges. The valuation of such stock transfers have to be

tackled as there would be no sale value available to calculate tax. There could be significant cash

flow issues as well. Special transition provisions will be required for the in-movement stock

from factory to depot on the date of introduction of GST.

Most of the new investments by auto companies have gone to the states that have offered most

competitive tax incentives. Such incentives are largely in the form of subsidies/loan equal to the

VAT/CST paid in the state govt. For instance, under the GST regime, the state of manufacture

will not collect any existing incentives (in terms of CST exemption/deferral) can continue.

Himachal Pradesh etc would also be affected.

One of the reasons for auto component manufacturers to set up units close to OEM plants is to

avoid breaking of the VAT credit chain. The removal of CST in the new regime would provide a

new opportunity for consolidation of these units into larger units, which would be good for

economic efficiency of the sector as a whole.

If the GST rate is fixed anywhere between 16-18% as being discussed currently, it may be a

good news for the industry. The current effective rate works out to be more, particularly for the

bigger cars, where the excise duty is higher.

Impact on Logistics Sector

The introduction of a national sales tax in India next year could have a similar impact on freight

demand as the creation of the European single market and customs union, according to leading

logistics operations.

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 Logistics firms are building warehouses and logistics parks across India as the country gets

ready for a centrally administrated goods and services tax (GST).

The GST will standardize rates across the nation, allowing many corporations to move away

from having warehouses in different states to adhere to each state tax code and employ logistics

companies to manage distribution and supply chain.

With GST coming in place, a lot of consolidation is expected in this space. The case for having a

warehouse in each state will disappear.  

Decisions on operational efficiency instead of tax optimization:

The implementation of GST in India, a welcome reform, is expected to bring in sweeping

changes in the way manufacturing, distribution and warehousing is carried out in India. Besides,

this significant change in India’s legislative infrastructure will catalyze shifts in the development

and investment in India’s physical infrastructure. The simplification and the introduction of a

uniform tax structure across states in India would mean that manufactures will now base their

logistics and supply chain based decisions on operational efficiency instead of tax optimization.

Complex tax structures have meant that manufactures, overtime, have set up their distribution

patterns through multiple, sub-scale channels. However, a phasing-in of GST starting in April

2010 will encourage manufacturers and logistics service providers to ignore state and tax

boundaries and be able to position DCs and warehouses and run their transportation and

distribution operation focused on time, cost but most of all, logic. This will also allow

manufactures to favourably consider outsourcing their logistics operations to professional 3PLs

and focus on their core.

However, there exist significant information gaps on the exact implications and consequences for

logistics in a post GST scenario. This is preventing manufactures and service providers to align

their supply chains with this significant change in the legislation and make timely and accurate

decisions about investment in and development of their logistics and supply chain focused

infrastructure.

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Multiple warehouses, inefficient distribution

Besides these tax implications, complex state-wise tax structures have serious rebounds on the

manufacturers. Inventory and distribution decisions are based on tax avoidance rather than

operational efficiency. Accordingly, most manufacturers maintain warehouses in different states

to evidence movement of goods from one warehouse to another to save on the CST. Also, quite a

few entities set up warehouses in locations like Pondicherry or Daman, often impractical from a

distribution point of view, as the CST rate at such locations were previously lower than the rates

prevalent in other states.

Typically, most large consumer durables or FMCG companies in India operate with 25 to 50

warehouses all over India, which is a very high number compared to developed economies (less

than 5-8) or even developing countries (less than 10-15) with similar geographical expanse. This

has severe implications on cost structure and operational efficiency levels of the manufacturing

firm which is ultimately borne by the end consumer either in terms of cost-quality trade-offs.

More sum total space & inventory requirement:

It is estimated that if tax avoidance is not a factor for deciding

distribution network, the total warehouse space can be reduced by 20-50 per cent immediately.

Small & inefficient warehouses:

Given the large spread of 4,000-10,000 sq ft warehouses, the average size

of a warehouse has remained small causing duplication of overheads and making it unviable for

owners and operators to introduce racking or automation. According to a broad estimate, scale

economies start to positively affect warehouses only when they are larger than 30,000 sq ft.

Distribution cost and inefficiencies:

There are significant cost and inefficiency implications of running a

distribution network over a spread of 25-50 warehouses in terms of smaller loads, smaller trucks,

and state boundaries being the determinant of transportation routes.

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Other Costs:

High cost ERP linkages throughout the warehousing network to ensure

real-time visibility of inventory result in higher IT costs. Further, multiple handling across the

various layers of distribution and multi-layered compliance requirements result in higher

material handling and compliance costs

HURDLES IN LOGISTICS AND ADMINISTRTION IN PRESENT TAXATION

SYSTEM:

Forms & Permits for various States:

Examples:

UP: Form 31 required for goods moving into UP and for imports another form 49 is

needed.

Rajasthan: Form 18A & 18B for incoming & outgoing goods. Form VAT 51 for the

goods passing through state but not to be delivered in the state.

West Bengal: Way bill 42 for incoming & 48 for outgoing goods. T.P. required for

Transit goods.

Punjab: S.T. form 24A for all incoming goods.

Orissa: Orissa way bill no. 32 (XXXII) for incoming goods. T.P. required.

What does it mean for logistics & administration?

Transporters & companies have to fill these forms for all the consignments, keep records

& submit returns. Also, distribution of forms is also controlled through serial numbers

and getting these forms itself is a complex process.

These forms have to be produced at the check posts and any discrepancy results in

detention of trucks.

Since checking of documents takes long, so there is a big queue of trucks at every check

post.

It drastically increases the transit time from source to destination. The transit times are at least

50% higher compared to other countries. It means that return on investment per truck is very low

in India. It is also one of the reasons for transporters unable to replace the old trucks that have

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outlived their lives. Some transporters resort to overloading to recover the cost of trucks faster.

Not only it leads to increase in costs (low efficiency) but also more accidents & pollution.

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SWOT ANALYSIS OF LOGISTIC SECTOR

STRENGHT

WEAKNESS

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Extremely critical for manufacturing industry and agri commodity industry.

No dearth in volumes Critical component in operational efficiency Contributes heavily in customer satisfaction.

High cost Low margin business Large number of unorganized players Low IT penetration Highly fragmented High Capital expenditure.

OPPORTUNITIES

THREATS

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Implementation of GST from 1st April

Implementation of Golden quadrilateral and NS-

EW corridors.

Heavy investments to improve infrastructure

through developmental projects like Mihan,

Delhi-Mumbai Industrial Corridor, Dedicated

Freight Corridor and National Maritime

Development Projects.

Increase in fuel costs.

Government Policy.

Taxation.

CHALLENGES IN LOGISTICS SECTOR

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Unfair Competition

Unorganized players get away without paying taxes Don’t follow the operating norms stipulated in the

motor vehicle act such as quality of drivers, vehicles, volume and weight restrictions.

Solution/Opportunity

Implies that a truckload loss of goods is always round the corner. Organized players can cash in by providing the requisite level of safety and insurance cover of goods.

Diseconomies of Scale

Different sales tax structure in different states.

Apart from non-uniform tax structure, LSPs have to pay other taxes like- octroi

Solution/Opportunity

Proposal of implementation of GST

Face multiple check posts

This delays the process of delivery

Compliance with varying documentation requirement of different states is certainly a difficulty.

Solution/Opportunity

Integration of IT into the process like EDI could greatly speed up the whole process and bring in the required efficiency.

Low IT penetration

Lack of communication infrastructure.

Lack of visibility.

Lack of real time tracking ability.

This leads to a lot of uncertainty and lack of transperancy in terms of cost structure and service delivery.

Solution/Opportunity

Penetration of 3PL players and high level of investments into technology like GPS would change the scenario

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Highly Fragmented Sector

LSPs stick to their basic services. They don’t provide value added services like packing/labeling, order processing, distribution, customer support etc

Solution/Opportunity

Value added services provide a great opportunity to increase the margins.

Supply Chain Impact

 

The dual GST structure will adversely affect the cost of supply chain, more particularly in

manufacturing sector –both for inputs and output. The supply chains could be in relation to

procurement of raw material and other inputs and in relation to distribution network for finished

goods. The problem areas could be in the form of physical delivery, entry barriers, inter-state

movement of goods, imposition of local levies (octroi, entry tax etc), longer transportation time

etc. In the proposed GST regime, while we move from origin based tax to consumption based

destination tax; entire taxation base would shift to a base where consumption of goods or

services takes place. Supply chain would also get affected as even inter-state transfer or depot

stock transfer would be subject to GST without there being actual sale of goods. It is feared that

longer supply chains would mean more tax compliance and cost attached to it. Companies will,

therefore have to revisit and realign their manufacturing facilities, procurement and distribution

channels, business processes, sale etc to strike a balance between economic and tax implications.

Businesses will have to and should undertake a complete review and assessment of compliances

under GST regime.

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IMPACT OF GST ON SUPPLY CHAIN

GST CHARACTERISTIC IMPACT ON SUPPLY

CHAIN

IMPLICATION

Extended Central GST Chain

At present, service tax on

logistics services consumed

during distribution and retail

are not off-settable against

CENVAT.

Extended Central GST chain

will allow the offset in post

manufacturing networks.

This will lower the cost of

logistics outsourcing as the

10.3% service tax charged by

logistics companies can be

largely offset against the

Central GST liability.

This will boost outsourcing in

Supply Chains and provide

greater impetus to 3PLs.

Affected Inventory

Post GST, inventory will also

carry Central GST & inter-

state GST input credit, the

tax rates may also get

changed for many products.

Unless the GST rates go up

for its products, the firms

would be encouraged to

minimize pre-GST inventory

which has less input credits.

As the GST implementation

Organizations need to study

GST's final mechanisms and

plan inventory transition very

carefully for themselves,

suppliers and Customers.

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date approaches closer, one

could expect uncertainty and

panic regarding pre-GST

inventory as was seen during

VAT introduction.

Subsuming Octroi &

Entry Tax

Octroi and entry tax are not

in line with the spirit of GST

although in some cases entry

taxes are VATable

Once these taxes are paid

reverse flow of goods

becomes difficult, hence

companies prefer postponed

and uni-directional flow of

goods across entry tax and

Octroi borders.

Organizations will be

encouraged to locate

warehouses and hubs in entry

tax and Octroi zones and stock

more inventories there.

Uniform taxation

Companies would no longer

be required to have a

warehouse in every state just

to facilitate stock transfers

and avoid CST.

Organizations can and should

design their networks purely

on supply chain considerations

and not tax considerations.

Procurement

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Possible higher tax outgo on procurement of goods and services on account of increase in

rate of tax.

Increased availability of credits across goods and services - Manner of credit availability

including possible restrictions.

Possible removal of exemptions on procurements.

Educating vendors on GST related documentation.

Distribution

Tax efficiency of direct interstate sales versus stock transfers.

Determining place of supply of services for payment of tax – possible need to split

contracts state-wise.

Possible change in taxable event: manufacture/ sale to supply of goods and services.

Manner of computation of tax.

Replacement of area based exemption by refund schemes.

Taxability of stock transfers, inter office supplies, captive consumption and warranty

supplies.

Determination of principles of classification and valuation of goods/ services/ composite

contracts/ deemed sales/ non sale transactions.

Commercial

Impact of GST on pricing of goods and services on account of increase in rate of tax as

well as increase in GST credits.

Review of tax clauses in contracts/ agreements and communication to customers.

Compliances

Redesigning IT systems;

Possible decentralized/ state-wise registrations and compliances;

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Possible interaction with State as well as Central GST authorities with respect to every

transaction.

Others

Training of personnel;

Transitional issues – migration of registrations/carry-over of accumulated credits/

continuing contracts/ transition billing etc

IMPACT OF GST ON 3PL

Even though more than 30% of logistics services in foreign nations are outsourced to third-party

logistics (3PL) providers, the picture is quite different in India. At present, less than 10% of

companies have outsourced their logistics services to 3PL providers. However, the scenario is

likely to change after the implementation of the goods and services tax (GST) in the country

from April 2011

If 3PL providers procure more orders in the near future, their business will get a huge boost.

Major players engaged in providing 3PL services will be greatly benefited if more and more

companies outsource their logistics services. This will not only ensure them of more business,

but also make logistics operations hassle-free for manufacturing companies. The major benefits

would arise from reduction in inventory, lower infrastructure space and reduction in

transportation cost.

CRISIL Research expects the revenues of the 3PL segment to grow strongly (27 per cent CAGR)

over the next 5 years from an estimated Rs 48 billion in 2008-09 to around Rs 162 billion in

2013-14, the expected implementation of GST and the higher 3PL penetration across non-bulk

sectors will lead to an overall savings in the range of 10-25 per cent. But, the research sees the

poor infrastructure and highly fragmented Indian logistics industry as major deterrents to the

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growth of 3PL industry. “A major deterrent to the 3PL story is the poor state of infrastructure in

India. Further, the Indian logistics industry is highly fragmented, with several small truckers

manning the scene and numerous players in the warehousing segment, as a result few players can

provide pan India services. Also there is limited scope for value-addition in some sectors and

usage across the value chain is not uniform,” says the research, but predicts that “on the whole,

3PL has great potential”. “The potential of the 3PL will be realized through a change in the

mind set of user industries and the ability of logistics players to offer integrated solutions

encompassing modes, infrastructure and IT networking,” says the research.

Estimated Size of 3PL and 4PL in 20 Years

Current GDP ( in INR trillion)

GDP in 2029with agrowth rateof 7% (inINR trillion)

Share ofLogistics (11%of 45% of GDP)(in INR trillion)

Share of 3PLand 4PL with a30% marketShare (in INRtrillion)

Share of 3PLand 4PL with40% marketshare (in INRtrillion)

55 212.83 10.53 3.16 4.21

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CONCLUSION

GST, if implemented efficiently, could prove to be a Good Sensible Tax. The advantages are

may be evidently laid out that is the increasing proximity of our tax system to the global tax

system. In a way, it may boost our economy and enable us to compete at the global front. As a

result, even our system may match the international phenomenon. This is the biggest advantage

of such a system. But every system has its own intricacies embedded at the initial stages. Lower

incidence of tax, reduced prices, a move towards the global concept, reducing cost of tax

compliance, better revenue collection, an efficient and harmonized consumption tax system in

the country all this looks good on the card, but is it really so easy to implement? Keeping the

various constitutional, technological, procedural and political barriers, the job seems easier said

than done. GST is a consumption tax that will create a seamless pan-India market and also bring

down the total incidence of taxes on goods and services by eliminating levy of tax on elements of

tax already built into the price of a good or service before that stage of taxation

The industries will also have to prepare themselves according to the new tax regime. The GST

will have its impact on all segments of the industries; Supply Chains will have to be redesigned

in order to minimize the manufacturing and distribution costs. The manufactures will now base

their logistics and supply chain based decisions on operational efficiency instead of tax

optimization.

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BIBLIOGRAPHY

1. First Discussion Paper on GST – by The Empowered Committee Of State Finance

Ministers

2. http://www.gstindiaonline.com/

3. http://www.gstindiaexperts.com/

4. http://www.business-standart.com/

5. http://www.forum4finance.com/

6. http://www.technopak.com/

7. http://www.goodsandservicetax.in.com/

8. http://www.transreporter.in/

9. http://www.taxindiaonline.com

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