The impact of GST on the warehousing sector in India
The Indian warehousing sector has experienced the burdensome nature of the age-old taxation system for many years. The pre-existing system of taxes and the interference of state boundaries caused businesses and manufacturers to pay taxes doubly, also known as the cascading effect of taxes.
Although ever since the implementation of GST, several reforms have taken place and companies are experiencing freedom from the double-taxation. The application of GST has created a culture where enterprises can focus more on the efficiency of the supply chain and other business areas, instead of aiming at tax-reduction mechanisms.
The Pre-GST Scenario
In pre-GST times, every product has to pass through multiple stages during production. These stages range from processing raw materials, assembling, storage and handling, transportation and more.
Possibilities are that enterprises either produce entirely on their own or outsource intermediate production services. Hence, creating a scenario where the output of one manufacturer is the input of another, an interdependent state of functioning.
A significant drawback before the implementation of GST was that as the raw material went through different stages of production, it caused a cascading effect of taxes.
In other words, the cost of products kept on increasing every time a product went from initial to final stages of production. As every step not only demands input costs but also requires the duty applicable on each stage, consequently resulting in the overburden of taxes for the manufacturers.
The implementation of Value-Added Tax was for removal of such double-taxation system. Tax burdens were controlled to an extent as taxes were levied only on the value a manufacturer adds on the product. Hence, limiting the overall tax payments to only the added value and not the final sale price.
However, the implication of VAT brought about massive resistance from individual state governments on the matter of revenue-sharing.
In India, the very nature of dual-governance lead to a twofold system of tax collection with excise duty, customs duty and sales tax.
For instance, a manufacturer based in Maharashtra will be levied Maharashtra tax for sale within the state. Whereas, if the same manufacturer wants to execute an inter-state sale CST is applicable as well.
Even after the implementation of the VAT system that was dedicated to exempt the cascading effect of taxes, couldn’t deliver as expected. The payment of VAT by definition is for products manufactured in the same state.
The only way a manufacturer could avoid CST was by buying a warehouse in other states, which wasn’t feasible. Hence, products suffered heavy tax burdens and attracted financial inefficiencies in production and manufacturing.
What is GST?
If we rewind and observe, the most critical downfall of the VAT system was the dual nature of governing bodies, a divide that sprouts in the matter of revenue-sharing that made it efficient only when businesses operate within the periphery of a state.
Goods and Services Tax (GST) can be regarded as a consumption tax levied on the supply of goods and services in India currently. GST is a comprehensive practice of charging tax that has been incorporated by the government and came into effect from 1 July 2017.
“GST can be regarded as a comprehensive form of taxation system due to the very reason that it eliminates the intermediate taxes that causes double-taxation in the supply of goods and services and reduces it to one single charge liable to all.”
GST is unique due to its characteristic of being multi-staged, which implies that a singular tax is charged at all stages of production. On the other hand, GST is a destination-based tax which aims at collecting the fee at the endpoint of the supply chain, that is after the product reaches the consumer.
The consumer is responsible for the payment of the product price in inclusion with the GST liable on it. After the completion of a sale, enterprises are accountable for the amount of tax to the government.
‘The GST is strategically designed to act as a replacement of the intermediate taxes that indirectly distort the efficiency of businesses.’
Impacts Of GST on The Warehousing Sector in India
The characteristic trait of GST eliminates the cascading nature of the pre-existing tax system. One can assume that GST is an augmentation of the pre-existing VAT system without the setbacks of double inter-state tax. The implementation of GST abolished the CST consequently eradicating state-boundaries and thereby making the whole country a unified market.
- The elimination of state boundaries means there is no need for manufacturers and enterprises to build separate warehouses at each different location.
- Removal of State boundaries reduced the number of warehouses and allowed enterprises to focus on other areas of business while emphasizing more on larger and more strategically located warehouses.
- GST will enable businesses to get rid of conscious tax savings and focus more on the efficiency of logistics and warehousing. Manufacturers and companies can invest more in the optimization of the warehousing sector, resulting in a smoothly operating supply chain.
- The warehousing industry has suffered from disorganization over time, although the implementation of GST eliminates the need to have warehouses in every city. The reduced number of warehouses allows companies to build bigger warehouses, with facilities that are designed for efficiency. Hence, ensuring that there are fewer, but better-organized warehouses.
- The need for more giant and more sophisticated warehouses allows warehouses to incorporate the use of Information Technology to utilize systems such as Warehouse Management Systems (WMS), which is not viable in smaller and disorganized warehouses.
- The inclusion of Information Technology systems has enabled enterprises to focus more on operational efficiency and increasing service levels. Consequently, supply chains have become leaner and are optimal in areas such as warehousing, transportation, distribution and sourcing. The most substantial impact of GST is on the decision-making of companies, as it is now based on optimal functioning rather than tax-saving techniques.
Benefits of GST on The Warehousing Industry
A report published by The Economic Times on 22 June 2018 claims that GST will lead to 100% growth in the warehousing sector.
JLL India also says that GST is playing a critical role in boosting the Hub-and-Spoke model and the development of Multi-Modal Logistics Parks (MMLP), estimating an increase in warehousing space to 112% by the end of 2021.
The CEO of JLL stated that the implementation of GST had affected the warehousing sector positively, as a result of the eradication of state boundaries.
The most significant benefit of the removal of state boundaries is that it will allow companies to explore more optimal distribution options, rather than the typical carrying and forwarding (C&F) distribution based models.
Another report by Financial Express published on 3 October 2018 portrays several other impactful benefits that came along with the implementation of GST.
Financial Express states that before the implementation of GST, the Compound Annual Growth Rate (CAGR) was noted at 15% between the years 2014 to 2016. Whereas, post-GST application a CAGR increased to 21% for the years 2017 and 2021 in top-eight cities in India according to KPGM report.
The implementation of GST and the shift of the focal point for businesses has led to smaller and disorganized warehouses transform into centralized warehousing hubs with a higher emphasis on the operational efficiency of the supply chain.
The country-wide implementation of GST has also sparked the need for on-demand warehousing and short-term storage requirements.
GST has changed the need for maintaining high inventory levels at all times, increasing demand for shared, centralized and on-demand warehousing environment. The focus has shifted from higher inventory levels to ensuring higher inventory turnover rate.
To top it all
GST has given rise to larger and optimized warehouses.
Warehouses that are designed to enhance productivity. Technological advancements will allow consolidated warehouses to implement state-of-the-art warehousing systems which are infeasible in small and disorganized warehouses. The implementation of GST is promoting standardized, high-quality warehousing in India.
The government has paid more attention to the warehousing industry by rewarding logistics and warehousing sectors with infrastructural status — attracting many foreign investors. India is expected to attain approximately 500 billion in investments for building storage facilities and effective in-house operational mechanisms.
Since GST has resulted in the removal of state-boundaries and made the whole nation a single market, businesses can now focus more on customer expectations and optimize their warehousing and distribution strategy. India is experiencing a rise in the on-demand warehousing industry. The consumer market is continuously evolving; businesses want their warehouses and distribution centres close to customers to reduce last-mile costs and fulfil orders faster.
The on-demand warehousing industry is helping e-commerce businesses, retailers, wholesalers, distributors and importers have better coverage in various markets. It allows companies to opt for warehousing and distribution solutions for only as long as they require, avoiding committing to fixed assets and contracts. The implementation of GST has propelled on-demand warehousing organizations to provide customized and technology-driven warehousing and distribution solutions at affordable prices. On-demand warehousing is helping businesses to stay customer-centric and meet service level expectations, resulting in faster delivery rates and better customer satisfaction.
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