GST and its powerful impact on logistics and warehousing

The year 2017 has been a year of major economic reforms for our nation. At first, demonetization shook the nation for good and then the passing of GST bill unified the taxation system in the country. The history of GST goes back to the year 2000 when it was first brought into light by PM Atal Bihari Vajpayee. Although it took a good no. of years to implement GST, it has finally nullified the cascading effect caused by the previous indirect taxation structure. You’ll be surprised to know that our neighboring nations of Indonesia, Thailand, Singapore, and the Philippines implemented GST in their countries in the early 1980’s and 1990’s, and thus gave birth to a very effective tax system.

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Before we jump into the details of the Goods and Service tax (GST), it is important to have a look at the previous taxation system implemented in the country.  Before GST was implemented, VAT was prevalent in the country, and it caused a cascading effect under which tax on tax was calculated and was paid by every purchaser involved in the supply chain. In this taxation system, the tax liability was passed-on at each stage of the supply chain and finally fell on the shoulders of the end user. This is defined as the cascading effect of the tax, wherein the tax is paid on tax, and the value of the good increases each time it happens.

Now, in the case of Goods and Service tax (GST), there is an option to claim credit for the tax already paid during acquiring the input product. This means that each time an individual claimed input tax credit, the sales price for him reduced, and the cost price for the person buying the product is reduced because of lower tax liability. As a result of this, the tax burden on the final customer is also reduced substantially.

Now that we have understood the basic difference between the previous taxation system and GST, we can say that GST is a multi-stage tax that is levied on each value addition. Besides this, GST is also destination based, it is levied at the point of consumption. For instance, if goods are manufactured in Uttar Pradesh and sold in Tamil Nadu, the entire tax revenue will go to Tamil Nadu. Let us further have a look at the components of GST –

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CGST: CGST is collected by the central government on intra-state sale

SGST: SGST is collected by the state government on intra-state sale

IGST: IGST is collected by the central government on inter-state sale

This means that when the sale happens within the state, both CGST and SGST (9% each and a total of 18%) will be charged, whereas, if the sale happens between states, only IGST (18%) will be charged. GST brings a unified taxation system to the country, wherein only one tax must be paid in the case of inter-state sales. This replaces the old regime where two different taxes had to be paid (central sales tax + excise/service tax).

GST has boosted the economy of India by removing the indirect tax barriers in-between the states and establishing a uniform tax rate throughout the country. This also means that the business sector in India is booming with the implementation of GST.

Now let us understand how GST positively impacts the logistics and warehousing sector.

Reduction in the number of warehouses

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Until now, the companies had a big warehouse in each state due to the different taxes imposed in the states. This led to increase in storage costs and poor infrastructure. Besides this, disorganization could be seen in the warehouses. But now that GST is implemented, there is uniformity in the tax rate throughout the country. This means that the companies no longer have to pay different taxes in different states. Companies can now have a single, big, warehouse at a central location. This big warehouse can be used to supply goods to the other states and thus decrease the number of warehouses. Companies can now choose or book the warehouses based on the hub and spoke model (A distribution model arranged like a wheel in which the traffic moves along the spokes connected to the hub at the center)

Better control on inventory

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The taxation system that was followed by the implementation of GST leads to a lot of complications when it came to warehousing. Many times huge inventory was set up and at other times the warehouses ran out of inventory when the demand rose. But with GST in the picture, inventory efficiency will be impacted positively. As there will be fewer stocking points, there will be fewer chances of stock-outs. Using economies of scales, the companies would be able to make better forecasts about the future demands, and thus keep the supply chain process up and running.

Implementation of technology

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As discussed above, GST will reduce the number of warehouses. This means that the consolidated warehouses would be at a central location and would also be larger in size to accommodate the inventory. Thus, properly planned warehousing systems can be implemented in these warehouses. State of art planning is not possible in the small and scattered warehouse but can definitely be implemented in a bigger warehouse. The use of latest technology in the warehouses shall ensure improved service and will also lower the overall cost of operations.

Organized warehouses

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The current setup of warehouses in India is quite unorganized. Research suggests that companies have between 20 to 30 warehouses in each state of the country. With GST in the picture, the companies will reduce the no. of warehouses, which will automatically lead to a more organized structure. Further, it will also result in an increase in overall efficiency.

Cost saving

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As the warehouses will become more organized, the cost of logistics shall also come down. As a result of this, both – the logistic service providers as well as the end customers, shall be able to save money.

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