MACRO-ECONOMICS AND BUSINESS ENVIRONMENT

GST Impact on Indian Logistics SectorBMU, Gurgaon

Goods & Services Tax

A Critical Analysis of
Impact of GST on Indian Logistics Sector

Completed Under the Guidance of

Dr. Saibal Basu
Prof SOM

Group Members:
Divakar Tyagi
Mohammad Ashif
Ashish Kumar Srivastava
Sukhdev Bhatia
MBA Hero Lead
2015-17 Batch
Module 2
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GST Impact on Indian Logistics Sector BMU, Gurgaon

Contents

1. Executive Summary ........................................................................................................................................ 3

2. Logistics Sector- An Overview ........................................................................................................................ 4
2.1 Elements of Logistics Cost ............................................................................................................................ 4
2.2 Industry Trend in Logistics ........................................................................................................................... 4
2.3 Associated Problems .................................................................................................................................... 4
3. Current Tax System ........................................................................................................................................ 4
3.1 Impact of Interstate Tax Regime on Logistics Sector .................................................................................. 4
4. Goods and Services Tax .................................................................................................................................. 5
4.1 Snag on Federalism? .................................................................................................................................... 5
4.2 Key Implementation Challenges .................................................................................................................. 6
4.3 Will GST Help in Cutting Prices?................................................................................................................... 6
4.4 Indian Logistics Sector After GST Implementation ...................................................................................... 6
4.4.1. What all will change ............................................................................................................................ 6
4.4.1. Overall Impact on Indian Economy ..................................................................................................... 7
5. Conclusion ...................................................................................................................................................... 8
6. Exhibits ........................................................................................................................................................... 9
7. References .................................................................................................................................................... 12

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GST Impact on Indian Logistics Sector BMU, Gurgaon

1. Executive Summary

On a steady pace, economies reform.

GST will help India to transform?

Backed by Industries and welcomed by economists, India’s biggest indirect taxation reform
is being seen as a snag on federalism due to which it is not finding its supporters in upper
house of parliament or may be due to lack of majority of ruling government.

Aims at making India a common market by removing fiscal barrier between states, this shift
towards indirect taxation is being called an unpopular move of central government by
opposition stating the reason that states will lose their financial autonomy1.

Extension in the series of first economic liberalization of India2, 1991 and to boost Make in
India campaign, GST is making promises of cutting prices of goods & services which will help
indirectly in getting more money in consumers’ wallet. But, at the same time states are
worried on their loss of revenue, excessive tax burden on wage earning classes, and political
instability.

Come what may, this is for sure, cascading effects of tax will surely be eliminated 3 because
of existing federal kind of tax structure4 on tax collection and Logistics Sector will be major
beneficiary of it as per the result’s findings.

GST implementation will reduce the logistics cost and increase the government’s tax
revenue by about 0.2% which will ultimately lead to GDP growth by 0.9%-1.7% according to
the National Council of Applied Economic Research.5

This papers aims at critically analyzing all the claims made in pros and cons of GST and to
finally recommend whether GST implementation is a sweet pill or a slow poison for Indian
Logistics sector and economy as a whole.

1
(The Hindu, 2015)
2
(Economic liberalisation in India, 1991)
3
(Maritime Gateway, 2015)
4
(Khattar, 2015)
5
(Agency, 2014)
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2. Logistics Sector- An Overview

Logistics industry is called the backbone of Indian economy. It employs 45 Million people 6.
Still, as per the World Bank’s Logistics Performance Index 2010, India is placed at 47th
position out of 155 countries7. India spends approx. 14% of its GDP on logistics8 which
translates into USD 140 billion. Industry is growing at 20% rate vis-à-vis the average world
logistics sector growth of 10% which will further add to spend on logistics cost.

Our Logistics cost contribution in GDP is comparatively higher than other developed
countries where it ranges from 8%-11% for example US, Japan9- 10% & Europe 11%.

2.1 Elements of Logistics Cost10

Transportation costs are approx. 40% with respect to other elements of the logistics costs in
India (Exhibit 1) across different sectors which is increasing continuously due to inefficiencies
at various levels in the entire system.

2.2 Industry Trend in Logistics11

Breakup of various transportation modes in entire industry can further be classified as per
Exhibit 2. Road transportation tops the list as per usage, 60% of total road freight traffic12 in
India. And, this is the major source of inefficiency in this entire chain also.

2.3 Associated Problems

Logistics is a high-cost and low-margin business. Economies of scale is almost absent in this
sector. It is mainly dominated by unorganized players while organized sectors13 are
responsible for only 6% share. Multiple ware houses (Exhibit 3), inefficient distribution,
infrastructure gap and most importantly Non-uniform tax structure make it more vulnerable.

3. Current Tax System

Whenever a good is produced or a service is delivered, various taxes are levied on it leading to
cascading effect on tax as per Exhibit 4. More precisely, at center and state level, various
taxes are being levied as per Exhibit 5.

3.1 Impact of Interstate Tax Regime on Logistics Sector

Logistics is a support function which is supposed to make the core operations of the
business more efficient, but due to the current interstate tax regime it is struggling to be
productive enough at par with other countries. Let’s see how14.

6
(IndiaBiznews, 2012)
7
(India Biznews, 2012)
8
(Shetty, 2014)
9
(Agarwal, 2011)
10
(IIMA, 2007)
11
(Jaidi, 2009)
12
(Sinha, 2014)
13
(Jaidi, 2009)
14
(Sinha, 2014)
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GST Impact on Indian Logistics Sector BMU, Gurgaon

Indian trucks drivers move freight approx. 280 km/day, world average is 400 km/day and US
does it 700 km/day. Prevalent tax law is one of the reasons behind this. Drivers spend 60%
of the time off roads negotiating check posts and toll plazas. There are approx. 650 check
posts & 11 types of taxes on the road transport in country.

Annually, Fuel worth USD 2.5 billion is spent on waiting at check posts. A vehicle pays USD
7,500/annum in the form of various taxes, which includes excise duty on fuel as well. This is
why freight cost is a major component of the cost of a product in India.

As per UBS, if the distance covered goes up by 20% per day, Indian truck’s productivity may
be improved by 12% and thus significant reduction in logistics cost and cost of a product.

4. Goods and Services Tax15

GST, a destination based & value added comprehensive indirect tax will be levied on goods
and services (except for a list of exempted goods and services) on manufacture, sale and
consumption at each stage of the life cycle. It will subsume all central and state indirect
taxes and levies.

On advent of GST, it will make tax system simpler, help in increased compliance, boost tax
revenues, reduced tax outflow in the hands of consumers and make exports competitive.

Already implemented in over 150 countries, GST in India is finding it difficult to get the nod
from policymakers because of their foreseen concern which prima facie may look genuine
also.

4.1 Snag on Federalism?

Constitution’s 122 Amendment Bill 2014 requires node of more than 50% states for GST
implementation but states are worried for below mentioned points-

 Danger on State’s Financial Autonomy- Sales taxes contribute to approx. 80% in

states’ revenue and they have complete autonomy over it. After GST
implementation, CGST & SGST will be fixed by GST Council, whose members will be
State finance/revenue ministers and chairman will be finance minister. Currently, for
any dispute, states seek shelter of Central Board of Excise & Customs (CBEC) but
under GST regime, it will be taken care by GST council which will have influence of
center government. This raises the question on bias free grievance redressal system.

 Political instability- Presently effective tax rate on manufactured goods is about 20%
on an average. Proposed GST have some component beyond this max limit. So,
states are worrying this excessive tax burden on denizens may affect their vote bank.

 Revenue Loss- States want high revenue generating sources not to be included in
ambit of GST. And also provide compensation for revenue loss.

15
(Smitha, 2014)
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GST Impact on Indian Logistics Sector BMU, Gurgaon

Governments has agreed to provide 100% compensation to states for the revenue
loss incurred during first 5 years and also kept some goods outside of its ambit.

 Levy of Additional Tax- To address fears of manufacturing states, government, on

demand, has proposed to levy 1% additional tax on inter-state sale of goods for the
initial two years but opposition is demanding for its scrap to protect the interest of
other states.

 Revenue Neutral Rate (RNR)- There is an ongoing debate on how much RNR should
be fixed to match government revenue. National Institute of Public Finance and
Policy initially proposed an RNR of 26.68% but a Cap of 18% is being demanded.

Apart from these political challenges, government is facing some implementation

challenges as well.

4.2 Key Implementation Challenges

 Huge Implementation Cost in infrastructure building (Exhibit 6, 7 & 8)
 Payment model and Tax collection mode to be decided
 Robust IT Network is required
 Skill enhancement of tax collecting staff to be matched with required

4.3 Will GST Help in Cutting Prices?

It is estimated16 that a 2% reduction in costs can increase a company’s profits by more than
20%. This benefit will surely be passed on to consumers in the competitive market in form
of reduced prices of goods and services on GST implementation.

4.4 Indian Logistics Sector After GST Implementation

Logistics industry looks to be upbeat the implementation of GST as this regime has some
tangible benefits in store for the industry

4.4.1. What all will change

 One Country One Tax
 Tax Burden Reduction
 Widen Tax Base
 Export Competitiveness
 Increased FDI/FII
 Reduced Cost of Production
 Moderate Prices of Goods and Services
 Increased Consumption of Goods and Service
 Boost to 3PL/Ware houses/Supply Chain Management

16
(Jaidi, 2009)
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GST Impact on Indian Logistics Sector BMU, Gurgaon

4.4.1. Overall Impact on Indian Economy

Consumer’s point of view

Consumers will have to pay less tax on goods and services and it will increase their
disposable income and they will consume more. This increased consumption will increase
net GDP and this will lead to high investment.
( )

Overall impact of tax

Investment will increase

Goods and Services point of view

Warehousing and rental cost, transportation cost and inventory holding cost will be reduced
with enhanced trucking efficiency. This will reduce price level of goods and services. That
means-

 It will raise the real value of money and make consumer wealthier, which will
encourage them to spend more and it will further result in higher quantity of goods
and services demanded.
 Consumer will have to spend less portion of their income for consumption (real
value of money increased). This will result higher saving, means money supply to
economy, means reduced interest rate, means higher investment, and means
increased higher goods and services demanded.
 This reduce price level will lead to lower interest rate, means domestic investors will
seek higher returns by investing abroad, means Indian currency Rupee depreciation,
means higher net exports.
Manufacturer’s point of view

Net taxation will be reduced. Manufacturers will able to serve goods and services at lower
cost. This will lead to more enhance human skills and more new plants and adopt better
technology.

Production function

( )

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Enhance Human skills

( )

Increase Capital

( )

Better Technology

( )

Pl. Refer to Exhibit 9.

5. Conclusion

Manufacturing is slated to account for 25% of GDP17 by the year 2025 and GDP growth will
also be boost up in near term as a result of various economic reform measures being taken by
ruling government. We can see the huge potential waiting ahead. And, GST can prove as a
mile stone for it.

Pending key decisions on issues like RNR & Exemption list is to be resolved rationally with
some review mechanism so that we may amend it as and when require in the interest of
Nation. State Leaders (Chief Ministers) should also to be taken in confidence if we want to get
the maximum benefit out of it.

If the above issues are taken care then we may firmly say that GST will act as a panacea for
removing the ill-effects of the current indirect tax regime prevalent in the country.

With this, we may rest assure that GST will transform Indian Economy.

17
(Admin, 2016)
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6. Exhibits

Exhibit 1

Exhibit 2 Exhibit 3

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Exhibit 4

Exhibit 5

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Exhibit 6 Exhibit 7

Exhibit 8

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Exhibit 9

Quantity of Rupees

7. References
http://qz.com/572857/why-indias-most-important-tax-reform-is-still-stuck-in-parliament/
http://www.thehindu.com/opinion/op-ed/gst-good-for-business-snag-for-
federalism/article7279180.ece
http://iimahd.ernet.in/publications/data/2007-03-07Pankajchandra.pdf
http://www.moneycontrol.com/news/tax/why-is-gst-important_1115265.html

http://www.businesstoday.in/tax/will-it-help-cut-prices/story/8473.html
http://profit.ndtv.com/news/economy/article-how-gst-will-change-the-face-of-indian-
economy-701413
http://www.gstindia.com/implement-key-structural-reforms-such-as-gst/
http://www.gstindia.com/gst-most-important-tax-reform-since-1947/
http://www.gstindia.com/gst-advantages-for-startups-and-small-businesses/
https://www.whatech.com/market-research/transport/124711-how-gst-will-transform-the-
transport-logistics-sector-in-india
http://www.infosysblogs.com/logistics/2010/11/gst_impact_on_logistics_indust.html
http://www.maritimegateway.com/mgw/index.php?option=com_content&id=46:india
http://www.indiabiznews.co m/?q=node/2283

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