GST will reduce up to 20% of logistics costs: Crisil

Complete phasing out of central sales tax and dismantling of check-posts key to realising full benefits, says Crisil Research.

It expects the roll out of Goods & Services Tax (GST) to reduce logistics costs of companies producing non-bulk goods by as much as 20 per cent [Non-bulk comprises all goods besides the seven primary bulk commodities transported by railways (coal, iron ore, cement, steel, foodgrains, fertilisers and petroleum and oil)].

The savings will accrue from a gradual phasing out of Central Sales Tax (CST), consolidation of warehouse space, and faster transit of goods since local taxes (such as octroi and local body tax) will be subsumed into GST.

However, to maximise benefits from the rollout of GST, a complete phasing out of CST (currently paid for inter-state movement of goods) and dismantling of state-level check-posts are imperatives. To get states on its side, the government has proposed allowing states to levy an additional tax of 1 per cent on supply of goods in lieu of CST for two years.

"We believe this is against the core principle of GST, and will defer full benefits of the rollout," Crisil said in a statement.

This will also delay the dismantling of check-posts so critical to ensure faster transit of goods.Today, a considerable amount of journey time – estimated at a quarter – is spent at check-posts and city entry points, which add to the cost of transporting goods, and forces companies to maintain buffer inventories.

Says Prasad Koparkar, senior director, Crisil Research, ''Manufacturers of non-bulk goods spend about 5-8 per cent of sales on logistics. GST will save warehousing costs of 1-1.5 per cent of sales in 3-4 years.

Eliminating check-post delays will yield additional savings of 0.4-0.8 per cent, thus taking overall savings to 1.5-2 per cent 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 and forwarding agents, the need to store products at controlled temperature, and timely delivery to retailers when taking decisions.''

Crisil Research's assessment shows the consumer durables sector will be the biggest beneficiary of GST, potentially saving 30 per cent of logistics costs from current levels of 7-8 per cent of sales. The sector has the most number of warehouses set up solely to avoid paying CST and hence offers maximum scope for consolidation.

Also, consumer durables have high brand recall and long shelf life, so can't be easily substituted. This would persuade manufacturers' to consolidate loads in larger warehouses.

For FMCG and pharmaceutical companies, cost gains may be a relatively lower 15-20 per cent. That's because both tax and logistics considerations have dictated their decision-making on warehousing.

Given that stocks need to be replenished quickly, warehouses are located closer to distributors. So consolidation will be more calibrated and gradual. To start with, they could consolidate warehouses near state borders.

Within FMCG, personal care and household products may see more consolidation, given the longer shelf life of products compared with food and beverages.