The most important issue in shipping to, from or within India
currently is the new India Tax reform scheduled to take effect July 1, 2017. This new tax structure will have a direct impact on logistics providers and cost structures. Whether shipping full container loads (FCL) to India, or shipping less than container load (LCL) shipments to Indi
a, this new law will impact ultimate cargo and logistics costs.
Currently, each of India’s 29 states taxes the goods that move across their borders at various rates. As a result, freight that moves across the country is taxed multiple times. The Indian government is about to roll out the new indirect tax program, GST, which has been in the works for over 12 years.
The impact of the GST on the individual companies located in India:
- The consumer durables sector is expected to witness maximum drop in the logistics costs as a percentage of total sales, as their warehouses are built in certain specific states to avoid interstate tax.
- Consumer-oriented industries are going to realize a higher impact from GST on their operations model rather than capital intensive industries, since they will work with cheaper labor and travel further to markets.
- As individual companies react to the changing of the law, the long-term economics of doing business efficiently outweigh the economics of where to be located to avoid being taxed. It remains to be seen what the ultimate impact will be on the economy or the country, but DGX predicts the Indian Government will rise to the challenge and make adjustments where needed to ensure a single industry does not become the poster child for unfairness.
From our standpoint and the standpoint of other 3PLs, the impact of the new GST on third party logistic service providers will be as follows:
- Post-GST implementation, most 3PLs will have to restructure their assets and realign their operations with changes in the operations of their customers in the new scenario.
- Currently, many 3PLs have warehouses located near major distribution centers of their key clients (different industries) irrespective of geographic disadvantage, mainly to avoid interstate taxes.
- However, post-GST implementation 3PLs are expected to build integrated warehouses at logistics suitable locations. So accordingly, 3PLs will have to restructure their assets to accommodate the long distance consignments which will occur with this scenario of free movement of goods across the country.
- The consumer durables sector is expected to witness maximum drop in the logistics costs as a percentage of total sales, as their warehouses are built in different states to avoid interstate tax. Mostly, the consumer-oriented industries are going to have the highest impact of GST on its operations model rather than capital-intensive industries.
How this will impact the freight rates with a change of cargo movement from direct to each state versus to regional DCs (spoke-hub distributions) is yet to be determined by carriers.
The DGX India headquarters in Mumbai
is ready to take on these changes and provide our customers with added-value solutions as they evolve in their supply chain based on these reforms.
What is GST? How does it work?
GST is a single, indirect tax for the whole nation, which will make India one unified common market.
It's a single tax on the supply of goods and services, directly from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
What are final GST rate slabs?
The Goods and Services Tax (GST) will be levied at multiple rates ranging from 0% to 28%. The GST council finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with lower rates for essential items and the highest for luxury and de-merits goods that would also attract an additional “cess.” In India, "cess" is an import or sales tax on a commodity.
Service tax will go up from 15% to 18%. The services being taxed at lower rates, owing to the provision of abatement, such as train tickets, will fall in the lower slabs.
In order to control inflation, essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero rate.
The lowest rate of 5% would be for common use items. There would be two standard rates of 12 per cent and 18 per cent, which would fall on the bulk of the goods and services. This includes fast-moving consumer goods.
Highest tax slab will be applicable to items which are currently taxed at 30-31% (excise duty plus VAT).
Ultra-luxuries, demerit and sin goods (like tobacco and aerated drinks), will attract a cess for a period of five years on top of the 28% GST.
The collection from this cess as well as that of the clean energy cess would create a revenue pool which would be used for compensating states for any loss of revenue during the first five years of implementation of GST.
Finance minister said that the cess would be lapsable after five years.
Which Taxes at the Centre and State level are being subsumed into GST?
At the Central level, the following taxes are being subsumed:
- Central Excise Duty
- Additional Excise Duty
- Service Tax
- Additional Customs Duty commonly known as Countervailing Duty
- Special Additional Duty of Customs
At the State level, the following taxes are being subsumed:
- Subsuming of State Value Added Tax/Sales Tax
- Entertainment tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States)
- Octroi and Entry tax
- Purchase tax
- Luxury tax, and
- Taxes on lottery, betting and gambling