GST will help firms cut logistics cost by 1.5-2.5%, say executives

Structural changes in logistics industry effected by goods and services tax (GST) will lead to commercial and economic efficiency


The proposed GST will lead to a larger number of bigger trucks on road as there is greater adoption of the hub-and-spoke model. Photo: Mint
The proposed GST will lead to a larger number of bigger trucks on road as there is greater adoption of the hub-and-spoke model. Photo: Mint

Mumbai: The proposed goods and services tax (GST) will help companies reduce logistics cost by 1.5 to 2.5% as they reconfigure their supply chains and bring in three key structural changes to the logistics industry, executives said.

First, as India becomes one big market, there will be fewer and larger warehouses. Second, it will lead to a larger number of bigger trucks on road as there is greater adoption of the hub-and-spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations.

GST is expected to save costs to the tune of 1-1.5% of sales over 3-4 years, said ratings agency Crisil Ltd in a Thursday note. Eliminating delays at check posts will yield an additional savings of 0.4-0.8% of sales. These cost savings are, however, more likely to be gradual and back ended, as corporates will have to realign their supply chain while ensuring minimum business disruption, it added.

“The impact of GST in logistics is going to be dramatic and revolutionary,” said Captain Uday Palsule, former managing director at Spear Logistics Pvt. Ltd.

Standard tax rates will allow corporations to move away from the practice of building a warehouse in different states to adhere to each state’s tax code. A big packaged consumer goods company could thus make do with one large mother warehouse at critical points in the country and employ logistics companies to manage distribution and supply chains, he said.

Over time, this will lead to development of new or expanded logistics hubs in different regions that would be driven by commercial and economic efficiency considerations rather than regulator matters, said Biswanath Bhattacharya, partner—infrastructure, government and healthcare practice at consultancy KPMG.

“With the formation of greenfield or brownfield logistics hubs, some of the transport linkages may need to be redrawn or their capacity expanded to align to future traffic patterns. This may lead to a need for broader roads leading to the hub, or even a new rail connectivity,” Bhattacharya said.

Spear’s Palsule said GST will result in larger trucks on road while the overall number of vehicles will go down. The new tax will result in greater adoption of a hub-and-spoke model in segments such as warehousing, cold chain, container freight stations and inland container depots.

GST will also bring in scale to logistics companies as there will be a lot of savings, stoppage of wastage and lower delays, said Shashi Kiran Shetty, founder and chairman, Allcargo Logistics Ltd.

As these companies gather scale, that will enable them to offer services at lower costs. As a result, companies for whom transportation is not a core part of their business will increasingly outsource their logistics operations to third party logistics (3PL) and fourth party logistics (4PL) service providers.

In the 3PL model, a company outsources various elements of supply chain management such as customs clearance, warehousing, order fulfilment and distribution to another firm (the third party). In the 4PL model, a firm outsources these operations to two or more firms and hires another specialist firm (the fourth party) to coordinate the activities of the third parties.

“The trend will be for increasing 3PL and 4PL logistics which essentially use an asset light model. They provide value-added services like packaging, track and trace etc. as well as courier and reverse logistics,” brokerage Nomura India Pvt. Ltd said in a note dated 20 July.

Allcargo Logistics, Gati Ltd, DTDC Ltd and Gateway Distriparks Ltd are some of the 3PL companies in India.

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