Impact of GST on the logistics sector

IMPACT OF GST ON THE LOGISTICS SECTOR

ZUBIN POONAWALLA29th August, 2014

GST

• Stands for Goods & Service Tax

• Broad based, single, comprehensive tax levied on goods & services consumed in an economy

• Seen as the panacea for removing the ill-effects of the tax-on-tax regime

LOGISTICS IN INDIA

• Interplay of infrastructure, technology & new types of service providers

• Rapidly Evolving

• Backbone for some key sectors like retail ,automobiles, pharmaceuticals etc.

• Contributes to around 13% of Indian GDP

• Top 10 Players in FY15:DHL, Bluedart, UPS, FedEx,DTDC ,Gati, Aegis, DelEx

GROWTH OF LOGISTICS OVER THE NEXT 5 YEARS

Lets assume the same CAGR rate of 9.9%

10.020.040.060.080.0

100.0120.0140.0160.0180.0

120.4 132.3145.4

159.8175.7

2014 2015 2016 2017 2018

In Billion US$

THE NEW CHANGE

1) CHANGING FOR THE GOOD

• Indirect taxes played a major role in deciding the supply chain structure of each business as some of the tax cost had no input credit option.

• The GST precisely addresses this anomaly & therefore, going forward, tax may not be a factor for deciding on the supply chain /distribution channel of an organization

2) WAREHOUSING

• Any large LSP, manufacturer or CPG player maintains warehouses in all the states of operations

• With 33 states in India, that accounts to 25-40 small warehouses (depending of regions & scale of operations) instead of 6-8 large warehouses which would be needed for geography of this size

• Adding to this inefficiency is the fragmented structure in Indian Logistics industry which results in extreme competition

WAREHOUSING

• Demand for warehousing is expected to grow at a CAGR of 18% in the next 4 years - thanks to the incoming investment in the retail sector & increasing import-export activity in India. • So, warehouses have a lot to do with the growth of logistics

sector.

• With the advent of GST & Zero CST :

The necessity of having a warehouse in each state to avoid CST & paperwork will be eliminated in a GST regime & network decisions would become purely cost & service driven.

• So now, we can revisit the supply chain network & identify opportunities for consolidation of warehouses to gain from scale & save costs of double handling

• We can club many of the small warehouses & have bigger + fewer warehouses.

THE EXPECTED CHANGE !!

BENEFITS :

• The larger warehouses can benefit from technological sophistication by deploying state-of-art planning & warehousing systems which are not feasible in smaller, scattered warehouses

• IT costs of having ERPs deployed at many small warehouses can be saved

• Transportation lot sizes will automatically increase, making way for more efficient bigger trucks

• Lesser numbers of stocking points

3)TRUE “HUB-&-SPOKE” SYSTEM

• Organizations will now be able to explore different distribution models such as setting up mother warehouse & regional distribution hubs .

• Thus, it can possibly step away from traditional C&F & distributor based models currently adopted

4) REDUCTION IN COST

.

I believe, with the introduction of GST, logistics & distribution costs in India could go down by 10% -

15%.

Zubin Poonawalla

• Cost drop will increase Profit Before tax by 10-15 % in turn increasing the PAT by around 7-11% .• (Assuming tax to be around 30%)

• This means that GST will strengthen the bottom line for all the logistic companies & thus, better margins.

• This also helps the company with better cash flows .

5) TRANSIT TIME

• GST would also improve our transit & consequently, delivery times because state border crossings would likely be uncomplicated.

• Less of paperwork is also a big benefit.

6)FAIR PLAYING FIELD

• As a result of reduced tax liability, GST will reduce the share of the unorganized sector in warehousing.

• Prices charged by the organized players will come down & reduce the price advantage that the unorganized warehouses currently enjoy.

• Thus, GST will level the playing field & create an equitable development of the industry across India.

HOW CAN LOGISTICS ADAPT THIS NEW CHANGE

• This can be done in various ways –

• Designing a multi tiered distribution network where there is specialization in certain functions (storage + inventory mgmt) & some functions (software services, packaging, labelling) are outsourced.

• Another will be to partner with a 3PL logistics provider to ensure optimal utilization of resources.

• They will need to take a fresh look at their supply chain to cater to existing geography & should also look at the new business areas that this impending legislation is due to bring.

HOW CAN LOGISTICS ADAPT THIS NEW CHANGE

• ERP System Changes• Pricing Revision• Revisiting Warehousing & Distribution Strategies• Revisiting Purchasing & Marketing Strategy

CONCLUSION

• The impact or rather the opportunity is huge for both the logistic companies & their customers to completely relook at their supply chain.

• This essentially means a significant opportunity for Logistics companies in India to revise their infrastructure to deliver as well as reverse logistics for spares & replacements.

Thank You