FROM MAGAZINE: GST India’s new "tryst with destiny"

India woke up to a well publicised roll out of Goods and Services Tax (GST) on July 1. GST proposes to make ‘one India and one tax’. We look at India’s transport and logistics sector’s tryst with this ‘good and simple tax’. Reji John

At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to new…” That is an extract from the “tryst with destiny” speech delivered by Jawaharlal Nehru, the first Prime Minister of independent India, to the Indian Constituent Assembly in The Parliament, on the eve of India's independence, towards midnight on 15 August 1947. 70 years later towards midnight on 30 June 2017 India once again made a tryst with destiny stepping out from the old to new. This time it was the official launch of the Goods and Services Tax (GST), the most sweeping tax reform for nearly 70 years.

President of India Pranab Mukherjee launched the new indirect tax regime at the stroke of midnight in the presence of Indian Prime Minister Narendra Modi, his cabinet colleagues and major industry leaders in a special function held at Indian Parliament’s Central Hall.

Prime Minister Modi termed GST, effective from July 1, as a ‘Good and Simple Tax’ and said its introduction was not just a tax or economic reform, but a social reform that would nudge people on the path to honesty and benefit the poor the most.

After 14 years of struggle to enlist the support of India’s states, the GST replaces more than a dozen union and state levies and unify a country of 1.3 billion people into one of the world’s biggest common markets.

Calling the GST a simpler, modern and more transparent taxation system that will do away with 500 different taxes levied across the country’s 29 States and seven Union Territories Prime Minister said that it would end the spectre of tax terrorism and Inspector Raj that India’s businesses have had to endure for long. This, he said, would be an outcome of the technological backing for GST implementation, which would do away with grey areas and the resultant discretion the bureaucracy enjoyed over tax payers.

India’s minister for Road Transport and Highways and Shipping Nitin Gadkari claimed that it is the logistics sector that will gain the most from GST as cost will come down by 20 percent. “Companies could do this with a hub-based warehouse system instead of having warehouses in all major consumer states. The check posts at state borders have already been brought down. Karnataka, Andhra Pradesh and Tamil Nadu, along with 20 more states, have dismantled border check posts, reducing hassles for trucks,” Gadkari said in a recent interview to The Economic Times.

The minister also said that people should give the tax reform at least a couple of months to have a smooth implementation. According to him, the border check posts have been removed even as states await electronic way bills, which will make truck movement easier. The e-way bill on Goods and Services Tax Network (GSTN) is expected to be introduced from October and will aid movement of trucks.

Mahesh Fogla, CFO, Patel Integrated Logistics (PILL), estimates that the transit time from Bangalore to Kerala will reduce by 8 to 10 hours. PILL trucks used to halt at each check post for minimum two hours. Post GST, this is going to change.

“This will ensure better productivity in truck drivers and most importantly the fatigue factor will be less enabling road safety and better driving conditions. As PILL branches are spread across the country there is a lot of paper work involved related to compliance and passage of goods, with e-way bills the paper work will come down and we also expect the costs to come down,” said Fogla.

According to Fogla, Indian industry and trade have always moved its logistics platforms to suit the cannons of taxation. “Be it for sourcing or for distribution logistics taxation vis-à-vis state of origin and destination decided how and where products should be stored, moved or billed. With GST it’s going to be one India and one tax.” PILL has chalked out plans to ride the tide and benefit from it by getting into active warehousing not only as a product offering but also as a backward/forward integration for its clients supply chain.

After having series of discussions with the Government of India and awareness programmes jointly organised by the Federation of Freight Forwarders’ Associations in India (FFFAI) and allied logistics associations, customs broking/freight forwarding community and logistics companies in India are all set to comply with the GST.

It is a well-accepted fact that there would be direct and immediate impact of GST on the logistics industry that includes customs clearance, freight forwarding, warehousing, distribution and supply chain industry in the country. It is also truly estimated by the government that GST would save companies around $14 billion because it would allow them to organise their warehouses and supply chains more efficiently. Firms can now move to demand-based "hub-and-spoke" models used globally, rather than operating state-by-state. As a result, there would be price corrections owing to reduced logistics cost, reduced transaction costs and transit time, and hassle-free transportation for domestic as well as international shipments. Hence, beneficiary would be Indian manufacturers, exporters and end users owing to Indian products being very competitive.

“The implementation of GST has been at a very appropriate time. Government’s initiatives like Make in India, Trade Facilitation, Single Window Customs Clearance, Ease of Doing Business, Startup India and impetus on domestic consumption as well as cost effective export cargo would definitely receive tremendous boost in long term. The urgent need is to further strengthen those initiatives through appropriate infrastructure, seamless cargo movement and rational/uniform tax policy across the country with proper implementation. GST would not only reduce the cascading tax burden it would also accelerate seamless cargo movement supported by a robust warehousing and distribution mechanism,” said Samir J Shah, Chairman, FFFAI.

According to Shah, now the concern area is implementation of e-way bill across the country in respect of reaping the logistical benefits of GST. FFFAI believes the Government would take quick and pragmatic decision in this regard to fully implement the much desired and long debated tax reform. FFFAI, however, welcomes the government’s decision on two-month relaxation in initial filing requirements to abate teething issues for the larger interest of $2 trillion Indian economy, making it more organised.

India’s express industry expects that the GST rollout will reduce the overall cycle time and cost. However, the industry says it is concerned about the government’s proposal to ensure goods move with e-waybills. “This would potentially negate the savings hoped for, and in fact would lead to increase in logistics costs and delays. At a time when India’s Logistics Performance Index (LPI) ranking has started looking up, it improved 19 places in 2016, the introduction of e-waybill as proposed has potential to seriously erode our LPI rankings,” said Vijay Kumar, Chief Operating Officer, Express Industry Council of India (EICI). According to Kumar users of express delivery services would face considerable disruptions to their businesses in the way e-waybill is being introduced.

The e-waybill proposed by the government entails that the transporter logs into the GST network and generate an e-waybill for providing vehicle number right from the time your shipment is picked up and then continue to generate e-waybills each time a vehicle is changed until the shipments are delivered to your consignee. On average nearly 3 crore shipments are handled daily by the express delivery industry alone. And a typical delivery cycle would entail that the shipments are on average transshipped 3-4 times. Each time a shipment is transhipped to a different vehicle the transporter will have to log into the GST network and generate e-waybills. This would mean over 9 crore entries in a day which would translate to about 3300 crore entries in a year to be done by the express industry alone. And if all segments of transporters are taken into account it would mean billions of entries in the GST network all to ensure vehicle numbers are captured.

While the mandatory e-waybill may cause delays initially and will certainly force express industry players to make necessary investment upfront to move into a complete digital transformation, EICI’s view that the proposed move is push down India’s logistics performance index is overly far-fetched.

“Instead of creating a system which would substantially delay delivery of shipments and thereby destroy value in the system as well as push up our logistics costs and inefficiencies, it would be better if the GST network creates a system which can realise its objectives by risk profiling and using the existing track and trace systems of the transporters,” suggests Kumar.

Ravichandran Purushothaman, President, Danfoss India, said the GST regime will cause a “tectonic shift” in India’s taxation history.

“I foresee transparency in the business chain which will enable significant value creation for the Indian economy. While this might require a shift in mind-sets of companies--from the way they do business, to the fact that all channels will have to be digitalised at every stage--the goal is perfection in execution to achieve transformation,” said Purushothaman.

Talking specifically on the impact of GST on manufacturing, Purushothaman said while the ‘Make in India’ initiative was started with the intention of making India as one of the top 10 manufacturing hubs in the world, though there have been several hurdles that companies faced in terms of cascading taxes. “With the introduction of GST, it will help streamline the sector, creating a cooperative synergy in the country. Some positive ways in which the impact being felt includes reduced cost of production, supply of goods with ease where we hope to see decreased state-border checks. The other side of the coin is of course, increased compliance requirements and supply-chain restructuring that might be required from the company’s side.

“The implementation of GST would impart much needed competitiveness to Indian exports with initial hiccups. The spin off effect on economy particularly on the logistics sector would also help both manufacturing and exports. The refund mechanism through an electronic platform will reduce transaction cost,” said Ganesh Kumar Gupta, President, Federation of Indian Export Organisations (FIEO).

The Customs Departments across India have modified its software to comply with the GST regime. In international transport, under GST, the most crucial aspect at the moment is the e-portal of Customs. Other players, including carriers (ocean and air), custodians (ports, airports, container terminals and container freight stations) and Customs brokers, have been preparing for the transition and it should be a smooth sailing. The logistics sector more or less appears geared to migrate to the new taxation system. Reports suggest that most stakeholders in the international transport sector are well-prepared and they don’t anticipate any problems.

Anjani Mandal, CEO of Fortigo Network said that there is going to be direct and in-direct boosts that the logistics industry will see in the future.

“The intent, the laws, the rules and the rates for services creates the correct environment for the organising of the unorganised sector and encourages every player in the highly fragmented road transportation business to support the government's intent to maintain the chain of clean business transactions,” said Mandal, who co-founded the logistics startup in the trucking sector.

According to Mandal, the combination of the rules on e-way bill announced earlier, the continuance of road transportation services on a reverse charge to be paid by the service recipient and the effective road transportation rate being at 5 percent will ensure that every participant of the highly fragmented road transportation industry feels motivated to make a transition to the organised sector.