Given the role that it plays in the nation’s functioning, the logistics sector can easily be deemed as the veins and arteries that keep both the nation and its economy alive. Today, the Indian logistics sector is estimated to be worth $194 billion, a figure that will further witness an increment of $21 billion within two years. And considerable credit for this development goes to the
GST implementation in India.
Our previous taxation system – which included a labyrinthine web of 17-odd taxes – wasn’t as forgiving towards the sector. Different states had different taxation systems that were levied from industry players that operated on their turf. So, in order to make their operations feasible in the longer run, logistics players had to pointlessly establish warehouses across all states where they operated.
This system caused inefficiencies on multiple levels. Here are some of them:
i. Increased Capital Expenditure: Since the logistics players could not leverage the hub and spoke model, establishing multiple warehouses needlessly increased the capital expenditure of businesses. The true financial incentive of the pre-GST model or the ‘captive era’ could only be realized over the due course of time (typically ranging from several years to decades in operations). This resulted in a needless lock-in of capital resources which negatively affected the overall viability of a business.
ii. Delayed business expansion: Even if it had a long-term financial incentive, the pre-GST model delayed the business expansion in more than one ways. Apart from the capital shortage, business expansion initiatives were also delayed due to complications involved in the process. A warehouse can only be finalized after assessing multiple factors such as connectivity with the desired locations, capacity requirement (in line with the future expansion plans), project costs, etc. And then, the land needs to be available in the preferred location and having a favourable valuation. This added to the stretch of time required for execution and delayed business expansion initiatives.
iii. Low integration of technology: Grade A warehouses, given their sheer sizes, are able to leverage state-of-the-art infrastructure comprising assembly lines, automated sorters, Pick/Put to Light systems, dimension weight scanning, and automated packaging. This considerably reduces the overall turnaround time which is otherwise experienced in intralogistics (internal) operations. Establishing such infrastructure is not feasible, and, at times, not possible, in the case of smaller warehousing units.
iv.Transportation costs: The highest share of costs within logistics operations is attributed to freight carriage. This can be as high as 50% of the overall logistics expenses. The complex tax structure required operators to increase the frequency of transport goods and disrupted supply chains by making them longer and inefficient.
v. Operational inefficiency at warehouses: An advantage of having a Grade A and B warehouses is that they can be used to store a range of products without the risk of deterioration. Also, centralized warehouses enable a business to use its storage space in the most optimal way. This advantage could not be realized in the pre-GST model as it created a network of semi-utilized warehouses that were sporadically located throughout the country.
These things changed as soon as the GST came to force in India, and they changed for good. The Indian warehouse industry is booming with supply, which was a limited commodity earlier, increasing with every year that passes.
According to the realty research firm JLL India, warehousing industry is pegged to witness a 112% growth by 2021 in comparison with its 2017 level (or when the GST law was passed). Out of this, 170% growth will be in the Grade A warehousing space and around 85% in the Grade B warehousing.
Source: economictimes.indiatimes.com