GST is expected to positively impact supply chain for almost all industries and provide opportunities for logistics companies to evolve their business model. The positive impact for user industries include reduction in costs and simplification of documentation, writes Manish Saigal, MD, Alvarez & Marsal (A&M).
GST, in many ways, is going to be one of the biggest financial reforms since independence. The paradox about this reform is that while the wait has given enough time for stakeholders to prepare, there still are many questions to be answered. Many of the expectations will get realigned as we move to the execution stage. Over the years, the indirect tax regime in India had evolved into a complex structure, which is expected to be simplified with the introduction of GST.
There are many aspects still to be answered, which include:
How will be the state and center’s share of tax evolve? This will have an impact on choice of consolidation centers for end users of storage and VAS services
The final classification list of products within each tax bracket will have an impact on choices that users will make
Impact of imposition of cess and practical & operational issues related to the same.
GST is expected to positively impact supply chain for almost all industries and provide opportunities for logistics companies to evolve their business model. The positive impact for user industries include reduction in costs and simplification of documentation. Some of the benefits to the users can be summarized as follows:
Industries with high inventory carrying and warehousing cost are more likely to shift from using many sub-scale warehouse across India to the ‘Hub & Spoke’ model.
Opportunities for logistics services providers
Implementation of GST could create multiple opportunities for logistics companies on account of supply chain optimization initiatives by companies in key industries. The opportunities can be broadly classified into two categories –physical infrastructure & services and expansion of role in the value chain.
Physical infrastructure & services:
GST will result in creation of hub & spokes for the users. Existing large logistics parks and new parks will evolve as key hubs. The hub location will be determined by logistics cost reasons rather than regulatory reasons. The hubs will need to be designed and located to enable the following:
Capability to handle multi-industry users including B2C
Connectivity with alternate modes – rail, road, water
Automation to enable velocity of cargo movement
Ability to provide infrastructure to conduct last mile value additions on cargo.
Expansion of role in the value chain:
The role of logistics companies is also going to evolve. Logistics companies will have to evolve to offer services beyond cargo movement, storage and handling. This will include certain activities like:
Inventory visibility and analytics
Channel support for goods including insourcing of C&F capabilities
Channel management and decision support system for movement of sales
Light processing and value additions along with documentation support.
Outlook for logistics stakeholders
Currently, around 6-8% of outsourced 3PL logistics is served by organized participants. GST is expected to change this penetration significantly. 3PL service providers along with logistics park developers are expected to be the biggest beneficiary of this initiative. The likely positive impact on logistics industry could be as follows:
Evolution of logistics as an operations function than a cost center in the industry
Value based selling is likely to replace cost led initiatives in logistics
Significant growth in organized companies could attract fresh talent result in innovations
Warehousing industry may witness significant automation and technology enablement.
The role of regulators will play a key role in smooth transition to the new normal. The expectations are high and the philosophy of GST is powerful. The benefits to the economy will depend on the effective implementation of the new regime without diluting the core principles. The journey will be exciting and outcome appears to be promising. However, the ride will be bumpy in short run as we migrate to the new normal.