MUMBAI: India's finance minister Jayant Sinha says the government's proposed goods and services tax (GST), expected to come into force next year, will improve the country's logistics industry by removing long lines of trucks at state borders.
India's Crisil Research calculates that companies can expect the logistics costs of non-bulk inter-state commerce to drop by 20 percent once borders checkpoints are removed.
The advisory and rating organization thinks the savings will come from the complete phasing out of the country's Central Sales Tax (CST) - currently paid on the inter-state movement of goods - the consolidation of warehouse space, and the faster transit of goods, since local taxes will be replaced by GST.
To get states to support the replacement of CST with GST, the government has proposed allowing them to levy an additional tax of one percent on goods in lieu of CST for two years. Crisil says this will have the effect of reducing the benefits of GST and delay the dismantling of the checkpoints.
Crisil estimates up to a quarter of the total transit time for a delivery is spent at check-posts and city entry points which add to the cost of transporting goods and forces companies to maintain buffer inventories in local markets.
Prasad Koparkar, a senior director of Crisil Research said: "Manufacturers of non-bulk goods spend about 5-8.0 percent of sales on logistics. GST will save warehousing costs of 1.0-1.5 percent of sales in three to four years. Eliminating check-post delays will yield additional savings of 0.4-0.8 percent, thus taking overall savings to 1.5-2.0 percent of sales.
"But this will be gradual and back-ended as companies will have to realign supply chains while ensuring minimum business disruption. For example, pharmaceutical companies will have to consider their network of carrying & forwarding agents, the need to store products at controlled temperature, and timely delivery to retailers when taking decisions," he added.
India's federal government sees GST as a key to creating a common market throughout the country by replacing indirect taxes levied by state governments that currently include excise duty, service tax, VAT and sales tax.