Finally, after a debate that went on for over half a decade, the Goods and Services Tax (GST) Bill has been passed. This indirect tax Bill, which is expected to result in a uniform tax across goods and services, except petroleum, alcohol, tobacco and selected products, will change the way industries, logistics and supply chains operate.

While teething troubles are expected in various areas, including the definition and valuation of goods and services under various circumstances, the Bill, set to come into force on April 1, 2017, will optimise production, inventory and distribution nationally. GST’s input tax credit system, where a business can avail tax benefits on tax paid to its suppliers and other service providers, should give organised players a greater advantage.

The Centre’s ‘Make in India’ campaign along with investments in transportation networks (road, rail, coastal and inland waterways) is expected to give further impetus to GST. In the long run, the creation of a multi-modal transport regulatory authority by the Centre should complement GST.

Besides optimising the production and distribution of goods and services, the GST Bill will also help speed up cargo movement. A 2015 joint report by the Transport Corporation of India and the Indian Institute of Management – Calcutta (TCI-IIM-C) shows that the stoppage expense (average expense incurred due to the stops along the way such as check-posts and customs) per tonne-km has increased from ₹0.16 per tonne-km to ₹0.28, a 75 per cent increase between 2011-12 and 2014-15.

The levy of duties by State authorities at check points is one of the main reasons for this rise in cost. This will come down once the Bill comes into force and should further increase the speed of cargo movement.

Over the past one year, the movement in stock prices of logistics players has been mixed. Transport Corporation of India and Allcargo Logistics have gone up by 9 and 13 per cent, respectively, while the prices of GATI and VRL Logistics were beaten down by 19 and 16 per cent, respectively.

Similarly, the price to earnings ratio (trailing 12-month earnings) of major stocks such as Allcargo Logistics (16 times), GATI (31 times), VRL Logistics (28 times) and Transport Corporation of India (16 times) is lower than their three-year average.

This indicates that the positive impact of GST may not have been completely priced in yet.

Warehousing gains, valuation hurdles Currently, goods incur 2 per cent central sales tax (CST) when they are manufactured in one State and sold in another. To avoid this, industries transfer the manufactured goods to warehouses in the State from where the sale of goods takes place. This helps them avoid CST while simultaneously availing the input credit that can be obtained through value-added tax. But this makes them incur extra storage costs.

With a fixed GST rate that is expected to vary anywhere between 18 and 22 per cent, coupled with virtual melting of State boundaries, the numerous smaller warehouses in many locations are expected to be consolidated into bigger ones. Manufacturing companies that own many small warehouses and third-party logistics providers such as Transport Corporation of India, VRL Logistics, and GATI, among others, are likely to move towards this hub-and-spoke service delivery model wherein distribution takes place from a large centralised warehouse to surrounding States.

The economies of scale achieved through this consolidation will reduce variable costs, enable automation and improve operational efficiency. Connectivity of these warehouses to consumption centres will improve with the development of multi-modal transportation systems.

The Transport Corporation of India is already in the process of building GST-ready warehouses across four locations (Nagpur – 1.65 lakh sq ft, Hyderabad – one lakh sq ft, Chennai – 45,000 sq ft and NCR – 2.5 lakh sq ft) in India.

GST should also favour VRL Logistics, a major player in parcel service and warehousing solutions, which intends to scale up operations in its existing trans-shipment hubs and increase focus on north, central and eastern regions. Similarly, GATI, a major logistics player, with more than five million sq ft warehouse capacity is also likely to improve its efficiency. The company is gaining strong traction with its parcel and e-commerce business. The recent quarter ending June 2017 saw GATI’s parcel and e-commerce revenue grow 49 per cent and 28 per cent, respectively.

However, valuing goods and services for the calculation of GST can be a challenge. A case in point is the difficulty in arriving at the gasoline cost, which forms a major fraction of total cost incurred by freight operators but is exempt from GST.

Containerisation – in full throttle Major domestic freight players like AllCargo Logistics, Navkar Corporation and Container Corporation of India are expected to have a positive impact from GST implementation. Over the last three years, twenty-foot equivalent container volumes for Allcargo Logistics and Navkar Corporation grew by 17 and 12 per cent respectively. But, in the case of CONCOR, port congestion and haulage charges were a dampener for container volume growth. These companies, operating their own container freight stations (CFS) and inland container depots (ICD), offer a wide range of services, including customs clearance and handling and storage of containers (both export and import). CFS is located near ports while ICDs are located in the hinterlands. ICDs help in decongesting traffic away from the ports.

Total container volume throughput in India during 2015-16 stands at 11.6 million twenty-foot equivalent units (TEU), an 8 per cent increase compared to the year earlier. With containerised transportation expected to double over the next five years and the share of trade through containerised transportation also set to increase, GST will add more impetus. With larger storage hubs, truck operators will transport higher volumes (full truck loads) thus optimising operations. Organised big players should be able to take advantage of these changes.

Allcargo Logistics, a diversified player offering storage, and custom clearance services for cargo at major Indian ports, is one amongst the top five CFS operators at JNPT, Chennai and Mundra ports. Its presence in coastal shipping and a land bank of more than 200 acres should also aid its expansion plans.

Navkar Corporation, a leader in containerised logistics, has warehouses spread over an area of five lakh sq ft. Its strong rail connectivity to ICDs, logistics parks and proximity to industrial clusters places it in an advantageous position.

Container Corporation of India (CONCOR), a Navratna company, which has more than 60 CFS/ICDs accounting for more than 70 per cent of Indian Railways’ container traffic, should strengthen its industry leadership position over the next three years. Over the next couple of years, CONCOR plans to set up around 20 multi-modal logistics parks across India and operate private freight terminals.

Transit time reduction Trucks in India currently travel an average of about 280 km per day in comparison to those in the US which travel 800 km per day. The report on revenue neutral rate headed by India’s Chief Economic Advisor Arvind Subramanian indicates that implementation of GST can add an additional 164 km truck distance per day, which is close to 60 per cent increase from the present day scenario. The argument is reinforced by the TCI-IIM-C report which shows that though the average fuel mileage has improved over the last few years, the nation incurs a cost of close to $6.6 billion annually due to transportation delays.

After GST implementation, reduced border checks and paper work is expected to cut transportation cost by 20-30 per cent. The increased savings should aid in improvement in operating margins for logistics players.

VRL Logistics, a dominant service provider operating close to 70 per cent of its parcel services at less-than-truck load, uses 3,872 owned and third-party hired vehicles for last mile connectivity.

We can expect transportation to take place at full truck load with GST roll-out. This favourable factor, along with the low net debt to equity ratio of around 0.5, should assist its plans for heavy investment in fixed assets creation across 28 States and four Union Territories. The reduction in transport time will also help Indian container companies. Further, the Centre’s heavy investments in dedicated freight corridors will also help in faster movement of goods transporters.

The increased speed of transportation will be a boon to the cold supply chain industry. Snowman Logistics, the largest company in this segment with a current market cap of more than ₹1,000 crore, stands to gain. The company had a year-on-year revenue growth of around 18 per cent in 2015-16.

Besides, CONCOR and Gati Kausar, a division of GATI operating in the cold chain industry segment, have plans to increase investment in this space.

Tax structure implications Currently, majority of business-to-business (B2B) suppliers make use of third-party logistics providers. Post-GST, the expected increase in service tax to 18 per cent from the current 14.5 per cent, is likely to reshape the procurement practices between suppliers, third-party logistics players and downstream manufacturers.

In the B2B segment, the downstream manufacturer could expect the supplier to bear some of this cost escalation. Some of the larger manufacturers could consider investing in a captive transportation fleet. This will decrease the cost incurred in paying the intermediate third-party logistics player. The revenue and margins for companies such as TCI, which operates in the B2B space, may hence come under pressure. But businesses may still depend on third-party logistics providers for the supply of essential spare parts that are needed at short notice. In the case of the business-to-consumer (B2C) segment, demand fluctuations and dispersed customer base will dissuade manufacturers from incurring high fixed investments. Here, we can expect third-party players to continue offering their services.

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