Will GST deliver for the Logistics Sector?

Kite Industry Insights: Logistics

Logistics is the backbone of the industry. In a country with over 1.3 billion people across a massive land area, any disruption to the logistics sector hampers the Indian economy as a whole. In part, this is why any change in petrol prices has such an impact on everyday prices. It is critical to note here that logistics involves the transportation of goods, not of people — though both systems employ millions of people across the country.

According to the Economic Survey of 2017–18, the Indian logistics industry provides employment to more than 22 million people. The industry has grown at a compound annual growth rate (CAGR) of 7.8% percent during the last 5 years. India has also, promisingly, jumped to 35th place in 2016 from 54th (2014) in terms of overall logistics performance. The Indian logistics market is expected to reach a valuation of USD 215 billion by 2020, growing at a CAGR of 10.5% after Goodes and Sales Tax (GST) implementation.

Any disruption to the logistics sector hampers the Indian economy as a whole.

To date, logistics in India is an underdeveloped sector. It is a labour-heavy industry, operates on outdated infrastructure, faces a blizzard of regulations, and lacks special equipment such as refrigerated trucks. These reasons contribute to the unnecessary loss of many perishables (mainly food) and means the industry is much smaller than it should be. The consumer also suffers, since logistics works much less efficiently than it would in optimal conditions.

What’s the solution?

To understand the impact of GST, we have to consider the landscape that existed before the overhaul:

1. Inefficient warehouse distribution

Most logistics companies maintained warehouses in different states to save on Central Sales Tax (CST), state entry taxes, and value-added tax (VAT). CST was levied on inter-state transactions by the Central Government, while state governments levied state entry taxes. In effect, goods directly supplied to dealers used to attract state VAT, because they were considered sales. However, transfers between warehouses were treated as stock transfers, on which there was no tax.

2. Lack of clarity for e-commerce

E-commerce players faced massive challenges in logistics before GST. Some states, like Uttar Pradesh and Uttarakhand, treated e-commerce operators (e.g. Amazon and Flipkart) as sellers. Consumers who purchased goods on Amazon’s platform that crossed state lines were forced to file a VAT declaration, while the deliverer had to file the registration number of the vehicle bringing the products. Non-adherence led to the seizure of goods. Meanwhile, Kerala, Delhi, Rajasthan, West Bengal and Tamil Nadu treated e-commerce sellers as e-facilitators. The lack of clarity in tax regulations saw some e-commerce operators like Amazon and Snapdeal even refusing to sell in UP and Uttarakhand.

3. Time wasted on compliance

According to the World Bank, trucks in India only covered 250–300 km per day, just a fraction of the 800 km and 450 km covered in the USA and Brazil (respectively). Truck drivers lost 60% of their time to paperwork and tax compliance at interstate checkpoints. Logistics costs increased two-to-threefold because of this waste. India’s logistics costs stood at almost 14% of the total value of shipments, as compared to the international benchmark of 6–8%.

After GST

1. Warehouse consolidation

Since the tax overhaul in 2017, the GST rate is the same across India. GST for transportation is now applicable in the state of destination, not the state of origin. This has eliminated state entry taxes and CST. In response, logistics players have started consolidating their warehouses. They are phasing out unnecessary warehouses, which will increase their operational efficiency and reduce operating costs. However, as we’ve noted before, this may have an adverse effect on employment in the areas surrounding those warehouses.

2. Increased travel efficiency

Many states have removed the checkpoints that used to exist at their borders, which has helped reduce truck transportation times. The All India Transporters Welfare Association reported that the average travel time on Delhi-Mumbai and Delhi-Chennai routes has decreased by more than 36 hours. Clearly, this will help in bringing down the cost per kilometer to transport goods, which should benefit consumers and society as a whole.

3. Compliance

The biggest advantage has been the replacement of the cumbersome paperwork through E-Way Bills, which need to be issued for the transportation of goods worth more than INR 50,000. Interstate E-Way Bills have been gradually introduced since April 1, 2018, and are now in use across more than 15 states. Transporters carrying goods need to generate E-Way Bills if the supplier has not generated one. By shifting this process online, this system has help reduce leakages, which should help the logistics sector run more time- and cost-effectively.

Many states have removed the checkpoints that used to exist at their borders, which has helped reduce truck transportation times.

4. Clarity for e-commerce sellers

GST law clearly addresses e-commerce sellers, who are treated as facilitators. This means the seller will charge GST from the buyer. The type of GST levied will depend on the location of the buyer and seller, and will be calculated as per the GST rate of the product sold. E-commerce facilitators will take 2% tax collected at source (TCS) from the sellers and deposit it to the government. The TCS provision is currently on hold until June 30, 2018. This clarification makes work easier for e-commerce platforms, and incentivizes the spread of e-commerce to more states.

GST has teething troubles

1. Ocean freight

Double taxation happens in the case of cost, insurance and freight (CIF) for ocean freight. When ordering a product from outside India, the buyer and the seller normally agree to a CIF contract. The seller arranges the freight and pays for the insurance to protect the product against damage in transit. The seller bears all risks until the product reaches the buyer.

As per GST laws, however, the buyer must pay GST on imports. The the buyer must pay basic customs duty and IGST on the entire sum. Further, the government states that the buyer must also pay an additional 5% tax on the ocean freight. Legal definitions state that the seller is the service receiver of the transport, and the shipping company is the service provider. However, the buyer ends up paying tax as if they were the service receiver of the shipping service, meaning the buyer pays double tax. A petition has been filed to the High Court regarding this issue, given the massive cost it imposes on Indian businesses and consumers alike.

2. Technical hurdles for E-Way Bills

E-Way Bills have had a bumpy rollout. Its first launch attempt on February 1, 2018 was unsuccessful due to technical glitches. In part, E-Way Bills involve a lot of technology and information that key stakeholders — drivers, logistics coordinators, sellers — simply do not have. The government has pushed out FAQs and launched workshops in English and regional languages to clarify the E-Way Bill. However, there is a clear need for more accessible, intuitive solutions for this system.

3. Goods Transport Agencies

The start of GST saw a lot of confusion regarding applicable tax rate for Goods Transport Agencies (GTAs). As per the law, the following parties must pay tax when they employ GTAs:

1. Factories
2. Societies registered under any law
3. Co-operative societies established under any law
4. GST-registered persons
5. Corporations established by or under any law
6. Partnership firms
7. Casual taxable persons

In other cases, GTAs (if registered under GST) pay the required tax. If both the GTA and the person whose goods were being transported are unregistered, then no tax is paid. This avoids burdening small businesses and individuals, but may encourage businesses and consumers to remain unregistered. This system caused massive misunderstandings, resulting in many GTAs and even small truck owners refusing to transport goods to small businesses and individuals. Professional firms and the government eventually had to intervene to clarify the particularities of the law.

E-Way Bills have had a bumpy rollout. There is a clear need for more accessible, intuitive solutions for this system.

4. ‘Bill To Ship To’ E-Way Bills

Suppose Person A, in Imphal, received an order for 100 bags from Person B in Kolkata. Person A is out of stock, so person A places an order with their supplier in Mumbai. Person A requests the supplier to send the 100 bags directly to Person B in Kolkata.

The main question is: how many E-Way Bills have to be raised? Even though there are two invoices—Invoice 1 (supplier to Person A); Invoice 2 (Person A to Person B)—the government has recently clarified that there should only be one E-Way Bill raised. Clearly, these more specific use cases will take time for the government to clarify; the state needs to stabilize these regulations in the coming months. Only then will the logistics sector benefit from the standardization that GST offers.

Conclusion

GST came into effect less than a year ago. Although its implementation involved many hurdles, it should have a long-term, positive effect on the logistics sector. It seems as if government is promoting the right landscape for logistics beyond just GST, for instance by allowing 100% foreign direct investment (FDI) in the sector. Some major analysts, such as CRISIL, have perceived GST as a positive change, and expect a 20% increase in the logistics sector thanks to it. In the coming months and years, the standardization of inter-state transport, the digitization of paperwork, and greater clarity for e-commerce should make for a more efficient and competitive industry. However, the job losses in state warehouses and the lack of clear regulations in certain use cases mean that the logistics industry waits for more clarity and more intuitive, digitized processes.