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 of the logistics industry set up their warehouses in the states they supplied to. Now, with the abolishing of CST, the freight transportation times has reduced by 10-12%.
GST Council plans to introduce the E-way Bill mechanism for smoother logistics. They are addressing the initial hiccups and are attempting to resolve the same.
GST has brought about the following modifications in the logistics industry:
In the logistics industry, transporters would have to follow a myriad number of taxes. This increased paperwork and made the process costly. Since the arrival of GST, taxes like Octroi duty, entry tax and CST have been eliminated. 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. GST has unified the entire Indian market, thereby eliminating extra paperwork.
Reduced Transit Times:
The potholes and unproductive transit hours and regulatory hassles often reduced the efficiency of logistics service providers. On the midnight of 30th June, the government scrapped toll nakas on various state borders. E-way bill will further increase efficiency by bringing down transportation costs and time. E-waybill guidelines state that inspectors can stop transport vehicle for inspection only once (except if there’s any hint of malpractice of any sort). If an inspector stops a vehicle for more than 30 minutes, the driver can upload details on the GSTN. Transporters and Logistics Service Providers will no longer have to grease inspectors’ palms.
Like we mentioned earlier, companies maintained warehouses in each state to avoid paying CST. GST 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, the logistics industry 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.
A logistics company 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 are short term costs and the other factors will contribute in cost reduction.