In the pre-GST era, a Central Sales Tax (CST) was levied on the inter-state movement of goods. To avoid this levy, manufacturers and traders set up their warehouses in the states they supplied to. Now, with the introduction of GST and abolishment of CST, there has been a reduction of 10-12% in freight transportation time.
The initial hiccups are being addressed by the government and attempts are being made to resolve the same.
1) Simplification: - The logistics sector had to comply with a myriad number of taxes which increased paperwork and made the process costly. Since the arrival of GST, taxes like Octroi duty, entry tax and CST have been done away with. This reduces the paperwork for traders who make inter-state supplies almost daily. Also, there were instances where trucks were stuck at state borders because of issues with state specific documents. Moreover, logistics service providers needed specific registration for certain states. GST has unified the entire Indian market, thereby eliminating extra paperwork.
2) Reduced Transit Times: - There are many things we pride ourselves in but our roads are definitely not on the list. Our weathered roads paired with unproductive transit hours and regulatory hassles would often bring down the efficiency of logistics service providers. On the midnight of 30th June, the toll nakas on various state borders were scrapped. The implementation of E-waybill will further increase efficiency by bringing down transportation costs and time. Preliminary E-waybill guidelines state that a transport vehicle will be stopped for inspection only once during the length of the journey (except if there’s any hint of malpractice of any sort). If a vehicle is stopped for more than 30 minutes, the driver can upload grievances on the GSTN. Transporters and Logistics Service Providers will no longer have to grease inspectors’ palms.
3) Warehouse Consolidation: Like we mentioned earlier, companies maintained warehouses in each state to avoid paying CST. Goods and Services Tax now allows for centralization and warehouse consolidations without increasing the costs. There is no longer a necessity for a company to have warehouses in each state. A demand for larger warehouses in strategic locations will increase. Correspondingly there will be a decrease in demand for smaller warehouses. This would give rise to mergers and acquisitions. Combining warehouses would mean lesser stocking points and lower variation in demands. And because the introduction of e-waybill would reduce the transit time, companies will opt for the hub and spoke model.
In this illustration the warehouse is the hub while the stocking points are the spokes in this hub and spoke model.
Logistics companies would have to divert some part of their funds to set up ERP accounting systems and inventory management systems to become GST compliant. However, these costs will be short termed and the other factors will contribute in cost reduction.