Great Step Taken for a unified market

After endless polemics and skirmishes stretched over some 17 years, the much-awaited GST, hailed as India’s transformational indirect tax reform, has become a reality.

However, there is little appreciation of immense palpable benefits that will accrue from GST for the country’s logistics sector. Imagine the disappearance of serpentine queues of cargo-laden trucks at ubiquitous check-posts, , and entry points, when GST is implemented as envisaged. Constituting around 14-15 per cent of India’s GDP vis-à-vis some 8 per cent in OECD economies, India’s inefficient logistics sector impairs its cost competitiveness.

Article 301 of the Constitution aimed at India functioning as one single economic unit without barriers, promoting free flow of trade and commerce. But, for seventy long years, post-independence, the country has indeed been a fiscally ‘disunited union of States’. As Finance Minister Arun Jaitley says, GST will add buoyancy to India’s economy by developing a common market and reducing the cascading effect on the cost of goods and services. Like post-World War II Europe successfully forging a common market, tearing asunder inter-country customs barriers and other check-posts, GST hopes to push India in that direction.

The Republic unified through the indirect tax law being enacted now will in a way be analogous to the 1833 Zollverein, German Customs Union, forged as a coalition of German states to overcome hundreds of customs barriers where shipments were inspected.

Analysing the cost of not completing European Community’s internal market integration, the Paulo Cecchini Report, The European Challenge, 1992 concluded that the border and associated administrative procedures cost 1.8 per cent of the value of goods traded within the Community, that the integration process could result in 4.5 per cent increase in GDP over six years, in addition to consumer prices declining to the extent of 6 per cent. The European integration which commenced with the 1986 Single European Act and the 1992 Maastricht Treaty endowed Europeans with a single market. Under the rubric of a common market, continental politicians pushed for harmonised tax bases and fiscal coordination — a route towards deeper integration. With GST belatedly becoming a reality, India too would hope to reap a similar harvest.

A joint survey, 2011-12 by Transport Corporation of India and Indian Institute of Management, Calcutta, revealed an annual loss of about ₹27,000 crore to the economy owing to detention to road vehicles at check-posts and en route for documentation, physical checks of vehicles, drivers, and cargo by RTO/police, and payment of highway toll and taxes, as well as harassment and corruption.

Industry estimates that 30-40 per cent time trucks lie idle at various check posts during their delivery schedules. The on-road stoppage expenses including illicit payments amounted, on average, to 15 per cent of total trip expenses. Additional fuel consumption due to delays and slow speed of vehicles led to annual cost of ₹60,000 crore.

Considering the cascading impact of country’s panoply of complex, inefficient and multiple taxes and user charges, National Council of Applied Economic Research found that the current transport pricing system is a result of multiple taxes and user charges established at different points of time. Each of India’s 29 states currently taxes goods, which move across their borders, at different rates.

The Centre levies indirect taxes in the form of union excise, import duty, and service tax whereas State governments levy sales tax/VAT, motor vehicle tax, and passenger and goods tax.

Within the road sector, about two-thirds of total tax revenue is collected by the State governments. The average tax burden is around 16 per cent in aviation and road sector and 14 per cent in water transport sector.

As the Economic Survey 2016-17 explains, India’s internal trade is about 1.7 times its international trade, and the current structure of domestic taxes as well as area-based tax exemptions might actually bias economic activity towards more internal trade. GST will eliminate the distortions leading to a normalisation in internal trade. The GST Network (GSTN) will have an audit trail of the movement of goods across the state boundaries. This will lead to optimisation of delivery schedules and operational costs of transporters.

India’s logistics sector has four main components: transportation (60 per cent), warehousing (25 per cent), freight forwarding (10 per cent), and value added services (5 per cent). According to Crisil, implementation of GST in the logistics industry will diminish logistics costs by up to 30 per cent over a period of three or four years.

Besides facilitating seamless inter-state flow of goods, rationalisation of paper work for road transporters and reduction in delivery time would lead to reduction in distribution costs. GST presents an opportunity for industry players to transform production-distribution infrastructure. The current sub-optimal scattered and fragmented warehouses would yield place to strategically located large logistics parks conducive to economies of scale, efficient use of multi-modal transport, and availability of value added services under one roof.

As the ‘organised’ logistics firms gain competitive strength vis-a-vis the unorganised sector, the post-GST competitive intensity will perforce rise. Again, as the large organised entities benefit from the requirement of scale and cost-efficient solutions, smaller companies will strive to focus on specialised niche segments. Certainty of tax and better compliance would attract interest from international logistics players through FDI, JVs or acquisitions, thus propelling Indian logistics industry to global standards.

Simultaneously, it is of paramount importance that nothing is done to let the pernicious inspector raj to sneak in the new regime. Why should it be considered necessary, as contemplated by State governments, to even randomly check at the toll posts the e-permits issued to transporters? Why must the service providers be obliged to register in every State?

Service providers having to register in every State they operate will end up filing multiple returns annually. Again, raising an e-way bill (with vehicle details) for consignments valued at over ₹50,000, and when transferring goods from one vehicle to another at every interchange point, would appear to be contradictory to the GST spirit. Based on inadequacies or inefficiencies, GST would have to keep evolving to yield optimal gains for the economy.

The writer was formerly CMD of Concor