The warehouse industry in India is estimated to be at INR 560 billion and is growing to be at 10 percent every year
Definition / Scope
In today’s scenario, a firm incurs a huge cost in managing different warehouses to overcome their financial regime. Their presence in the supply chain has an additional administration, service utilities and technology cost to manage these entities. The main contribution of GST will be in the removal of Cascading effects. There are various Central and State taxes that are levied on goods and services. This tax-on-tax results in higher costs of goods. Implementation of GST will lead to removal of tax on inter-state sales.
The warehouse industry in India is estimated to be at INR 560 billion and is growing to be at 10 percent every year.The growth in Indian warehouse industry is primarily driven by growing manufacturing activity, rise in domestic consumption, increasing international trade, growing organised retail in the country and increasing private and foreign investments in infrastructure.
Apart from traditional storing services, warehouses now provide additional services such as merging and breaking up of cargo, packaging, classifying, bar coding, reverse logistics, etc adding value to the customers.
The different types of warehousing segments in India with their major players in the industry are:
- Industry/Retail warehousing- DHL, Safexpress, MJ Logistics, Allcargo, etc.
- Liquid storage- IMC Ltd, Vopak India, Indian Oil Tanking, Sealord, etc.
- Agri warehousing- National Bulk Handling Corporation Ltd., Adani Agri Logistics, Ruchi Infrastructure Ltd, etc.
- Cold stores- Snowman, Cold Star, ColdEx, MJ Logistics, Fresh and Healthy Enterprise, etc.
With the availability of different tax structure across Indian geography, fiscal costs have always been a key factor for structuring supply chain in India, along with manufacturing unit and distribution networks engineered to harness tax benefit.
With that consideration, GST is implemented to make India a single market, transiting from an existing origin-based tax structure to a destination-based tax structure. This will have a strong impact on the manufacturing firm, supply chain and distribution channel. Warehouses are an important part in the supply chain. A warehouse placed strategically not only improves the levels of customer service but also reduces the burden on other supply chain elements. There are both opportunities and challenges in implementation of GST.
One of the opportunities of GST is to make supply chain leaner, but the challenge is its implementation and its impact on warehouse industry.
At present, 90 percent of the warehousing market is captured by unorganised sector and will continue to dominate within the first few years of GST implementation. The industrial segments which constitute a higher share of warehousing demand by the organised sector are engineering, pharmaceutical and electronics goods.
The bill has been passed in Lok Sabha on May 6, 2015, but still facing challenges to be passed in Rajya Sabha due to the concern of few States for losing out on revenue, collected from the rates and levies under local tax rates, hence government has introduced compensatory packages.
After full implementation of GST, operational efficiency will became factor for pricing between organised and non organized sector and it will take time for each and every segment to come directly under the organised sector.
Top Market Opportunities
Growth in production and organised retail, the major segment which contributes towards the Indian logistics industry is the warehousing sector. Growing at 10 percent every year as per EY, the warehousing market will continue to grow and is expected to be double within the next decade. The implementation of GST will play a major role in the logistics and warehousing sector. Around 15 Central and State taxes and tariffs will be subsumed by GST for a single tax levied at the point of sale.
Because of the current complicated tax structure, the logistics decision and choice of setting up of inventory and distribution centres are taken on the basis of applicable CST and VAT rates, rather than operational efficiency. With GST implemented, there will no longer be necessity of having a warehouse in every state, where a firm does business. The same decisions will be free from tax consideration prospective and will purely base on operational and logistics efficiency, as said by KPMG India Pvt. Ltd. The impact of GST on the manufacturers is huge and has been explained by taking few scenarios shown in the tables in exhibit.
From Table 2 in exhibit, it can be seen that, there is a rise in final price paid by customer. To maintain the same MRP, the firm has to lower its margin, so that the distributor and retailer’s margin are preserved. This also shows that the distributor has to depend on the product available on the warehouse located in their states rather than getting it from the firm in another state as that will take longer time and cost. But, with the introduction of GST, the barrier of cross-border sales tax will be removed and the firm and the distributor can enjoy same margin without increase in the final price of the product, shown in Table 3 & 4.
This will also lead to changes in logistics requirement of manufacturers, forcing them to rethink their business operations, having fewer and more strategically placed warehouses. So, it is proved that with the implementation of GST, it would lead to benefit of different sectors including Logistics.
At present, each of the 29 states in India taxes goods which move across their borders and at different rates, as of which, the goods is taxed multiple times. Also, there are long delays at the inter-state checkpoints as the authorities review and examine fright and put relevant taxes and other levies.
These delays count to average five-to-seven hours in all checkpoints. As more than 65 percent of the freights moves by road, it found very crucial to implement GST in India. As per World Bank estimates, delays caused by roadblocks , checkpoints and other stoppages could cut freight times by 20 to 30 percent and logistics costs by 30 to 40 percent. With proper GST implementation, this can boost India’s manufacturing sectors by almost 3 to 4 percent of net sales.
Market Size and Forecast
Figure 1: Existing Supply Chain Model
Table 1:Current Scenario- Intrastate Stocks Transfer Sale
Table 2: Current Scenario- CST Sales to Distributor
Table 3: Future State: Implement GST-CST Charged on Interstate Sales Eliminated
Table 4:Future State: Eliminate CST-Interstate Sale or Transfer Charged
GST is presumed to be the next big-bang financial reform in the Indian context. It will be a boon to various industries. It is a good time for the players to restructuring their ideas with an opportunity to increase profitability which were previously unavailable. They can proactively invest to make their supply chain leaner and efficient. They must also ensure that cost competitive structures are put in place.
One way can be parting away from traditional Carrier-and-Freight model and setting up strategically located warehouses. Also, it can be partnering with a 3PL or 4PL to ensure optimal utilization of resources. If the company finds it fruitful then, in the long run, it can acquire the logistics provider to have a competitive edge in the market.
GST will simplify India’s tax structure, by broadening the tax base, and create India a common market. This will lead to increase in India’s Tax-to-GDP ratio. Also, as per the National Council of Applied Economic Research report, it is expected to increase economic growth by 0.9 to 1.7 percent. Also, there will be rise in Exports by 3.2 to 6.3 percent
The average tax burden on India Inc will fall with the implementation of GST. Production costs reduction will make exporters more competitive. It will add about 2 percent to India’s GDP growth
Manufacturing companies can now strategize about changing their current business plan and look for better opportunities to cut down costs, such as placing BOO (build-own-operate) or leasing space in warehouse.
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