Mumbai: The research division of rating agency Crisil Ltd expects the roll-out of goods and services tax (GST) to reduce logistics costs of companies producing non-bulk goods by as much as 20%.
The savings will accrue from a gradual phasing out of central sales tax (CST), consolidation of warehouse space and faster transit of goods since local taxes (such as Octroi and local body tax) will be subsumed into GST, Crisil Research said on Tuesday.
Non-bulk comprises all goods besides the seven primary bulk commodities transported by railways (coal, iron ore, cement, steel, foodgrains, fertilisers and POL or petroleum, oil and liquid).
However, to maximise benefits from the rollout of GST, complete phasing out of CST (currently paid for inter-state movement of goods) and dismantling of state-level check posts are imperatives, Crisil Research said.
“To get states on its side, the government has proposed allowing states to levy an additional tax of 1% on supply of goods in lieu of CST for two years. We believe this is against the core principle of GST, and will defer full benefits of the rollout. This will also delay the dismantling of check posts so critical to ensure faster transit of goods," Crisil said.
Currently, a considerable amount of journey time, estimated at a quarter, is spent at check posts and city entry points, which adds to the cost of transporting goods and forces companies to maintain buffer inventories.
“Manufacturers of non-bulk goods spend about 5-8% of sales on logistics. GST will save warehousing costs of 1-1.5% of sales in 3-4 years. Eliminating check-post delays will yield additional savings of 0.4-0.8%, thus taking overall savings to 1.5-2% of sales," said Prasad Koparkar, senior director, Crisil Research.
“But this will be gradual and back-ended as companies will have to realign supply chains while ensuring minimum business disruption. For example, pharmaceutical companies will have to consider their network of carrying and forwarding agents, the need to store products at controlled temperature and timely delivery to retailers when taking decisions," Koparkar said.
Crisil Research’s assessment shows the consumer durables sector will be the biggest beneficiary of GST and could save 30% of logistics costs from the current levels of 7-8% of sales. The sector has the most number of warehouses set up solely to avoid paying CST and hence offers maximum scope for consolidation.
For FMCG and pharmaceutical companies, cost gains may be a relatively lower at 15-20%. That’s because both tax and logistics considerations have dictated their decision-making on warehousing. Given that stocks need to be replenished quickly, warehouses are located closer to distributors. So consolidation will be more calibrated and gradual, the report said.
The Rajya Sabha select committee formed to discuss the GST bill will meet on 16 June to hear the concerns of the industry and some states about a proposal for an additional 1% levy on the supply of goods, Mint reported on 8 June.
The proposed tax over and above the GST is a cause of concern because it is expected to have a cascading effect as goods move from state to state and companies cannot claim input tax credit on it, Mint reported.