LOGISTICS INDUSTRY

GST – a mixed bag of opportunities and challenges for the industry

ICRA Research Services

GST Impact Contacts

Subrata Ray
The logistics industry broadly encompasses five segments, namely, transportation (road/ rail/ air/ water freight), warehousing, third party
+91 22 6114 3408
logistics (3PL), port logistics (Freight forwarding/ CFS/ ICD/ terminal handling/ shipping), and express cargo delivery.
subrata@icraindia.com

Implementation of Goods and Services Tax (GST) would favorably benefit various facets of logistics including transportation, freight Shreekiran Rao
forwarding, warehousing, contract logistics, container services, and express cargo delivery, amongst others. The benefits would be driven by +91 22 6114 3469
1. End-user industries remodeling their supply chains in order to improve their operational efficiency; logistics will have a vital role Shreekiran.rao@icraindia.com
to play
2. Reduced bottlenecks along the route, leading to better asset utilization
3. Seamless availability of input tax credit
4. Widening tax base to result in shift of unorganized players into organized setup

Key aspects of GST and how these impact the logistics industry have been described below; road transportation, warehousing and contract
logistics are the key sub-segments to be impacted favourably.

Simplified indirect taxation and standardization of related procedures

Single taxation at a national level, as against multiple taxes at various stages and at various rates by each state, will result in more efficient
transportation across the states, streamlining paperwork for road transporters, and preventing long waiting periods at the inter-state check
posts, thereby bringing the logistics costs down. Currently, waiting periods at these check posts average six to seven hours. As per a World
Bank estimate, reducing the delays by half due to roadblocks, tolls and other stoppages could cut the truck transit times by nearly 20-30%
and the transportation costs by nearly 30-40%. While part of these benefits will be passed on to the end-user industries, the overall impact
is expected to be positive on the transportation segment.

Further, as the end-user industries remodel their supply chains and strive for efficiency, we expect the value addition from logistics industry
to improve further. As the companies move away from having warehouses/ depots at multiple locations (aimed at optimising Central Sales August 2016
Tax on goods sold across the states in the current system) to a distribution system driven by overall operational efficiency, the logistics
service providers will have to realign their business model with the changing requirements of the customers. This will offer enormous
opportunities for the logistics industry as the complexity of and potential value addition in the business would increase considerably. The
truck fleet owners will have to review their fleet (may shift towards higher tonnage haulers; relocate the fleet closer to the new

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 GST impact on Logistics industry
central/zonal warehouses), 3PL service providers will have to evaluate the location of the warehouses, and the warehouses will have to reassess the scale of business that would
be available and the resulting optimal size of the warehouse. The small and unorganized players also will have to rethink their strategies and align themselves with the larger
players.

Change in effective tax rate

While the indirect tax rate is likely to increase on the freight rates, rentals and service charges (the GST rates being discussed of ~18-19% as against 15% service tax currently
applicable) charged by a logistics service provider, the same will be passed on to the end customers. Hence, the change in rates will not directly impact the logistics industry.

Seamless availability of tax credit

As the GST proposes to subsume a number central and state taxes in itself, the GST input tax credit will be available across the value chain and prevent tax cascading. The
logistics service providers will be able to offset their GST liability not only against the credit received on any service consumed, but also on purchase of goods and capital assets.
This will favorably impact the cost structure and hence on profitability of the industry to some extent.

Widening tax base

Widening the tax base by setting a lower exemption limit, stricter checks and compliances to prevent breakage of chain and tax evasion, and availability of seamless input credit
(assuming some of the benefit will be passed on to the end customer) will reduce the tariff differential between an unorganized service provider and an organized one, thus
promoting the shift from being ‘unorganized’ to ‘organized’. The Indian road transportation industry, which currently is dominated by unorganized segment (~70% of freight
carried), is expected witness a major shift towards organized sector with implementation of GST.

Summary
Exhibit 1 below summarizes the overall impact of GST on the logistics industry. In our view, as GST implementation would bring about significant improvements in ease of doing
business and in supply chain efficiencies of various industries, the logistics industry, being a facilitator, will witness considerable opportunities for growth. While the logistics
industry will face challenges in reworking its business model to align itself with the evolving procurement and distribution strategies of the end-user industries due to GST, we
do not expect any adverse impact on the profitability of the logistics industry. On the contrary, ease of inter-state movement and resulting reduction in transit times and costs
is expected to drive long-term improvement in profitability of the transportation industry. We expect sizeable investments by the warehousing and the contract logistics
companies towards setting up large and technology-enables warehouses at strategic zonal centers; while this is expected to impact the near-term profitability of these
companies, the same shall be positive over the longer term. In the absence of clarity with respect to the applicable GST rate on the logistics industry, the continuation of
reverse charge mechanism for a Goods Transport Agency, the allowable input credits and the timelines for implementation, the quantum of improvement in profitability and
the extent of investments that could go into the logistics industry remain uncertain.

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 GST impact on Logistics industry
Exhibit 1: Impact Analysis – GST on Indian Logistics Industry

Key end-user industries remodeling their supply chain post GST, thereby directly impacting logistics industry
FMCG, Pharmaceuticals, Consumer Durables, Automobiles and e-commerce
Supply chain strategies of above industries post GST:
- Based on operational efficiency, as against tax considerations
- Direct deliveries to large dealers; reduce C&F agents
- Larger zonal warehouses; reduce smaller ones
impact
Wareshousing
Impact Warehousing
 Need to realign with client distribution strategy
o Presence closer to production and consumption centers
 Reduction in number but increase in size of warehouses
o To increase technology adoption and automation
Challenges ahead
 Realign to evolving client needs – relocation, consolidation and closure
of warehouses
 Investment in systems and technology for automation and larger scale

Impact Contract Logistics

Express and
 Demand growth
other value Contract
added o Easy inter-state transportation
Logistics o Single service provider for all distribution requirements

Logistics Challenges ahead

 Investment required to create logistics infrastructure &
High Impact Segments technology
o To be able to cater to multiple clients from a single location

Impact Road Transport

 Lower costs
Freight o Efficient inter-state transportation
Forwarding; Transportation o Higher asset-sweating
Port Logistics o Input tax credit availability
 Increase in tax on freight services, but to be passed on to customers
 Narrow price differential between organized and unorganized segments

Challenges ahead
 Reassess fleet size and mix of vehicles to cater to evolving client needs
Source: ICRA research

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