The budgetary announcement by Finance Minister Arun Jaitley on Monday heralded many positives for the infrastructure sector and logistics industry. 2.21 lakh crores of rupees are a record for investment in infrastructure for the nation. That said, it is much needed for the country’s growth story to stay on track.
If the investment is executed as planned, the infrastructure sector will receive a massive boost consequently giving an impetus to the logistics sector. The effects of a solid logistics infrastructure would cascade on the domestic economy. Improvements in the logistics sector translates to more competitive prices, better delivery times and in general, an economy that functions better.
Rail and Road
The country is in dire need of rail and road connectivity. In light of this it was great to see the promises made by the government when it came to roads. 10,000 kms worth of roads are slated to be built with 97,000 crores dedicated for this task. 85% of existing projects were languishing and there will be a focus of putting them back on track by the next fiscal. These are mostly state highways but crucial when it comes to establishing connectivity that the logistics sector can utilize to expand its reach and optimize its functioning.
Service tax on haulage services by Indian Railways to Container Train Operators was reduced from 14% to 4.2%. The impact of this is largely positive as reduction in railway haulage charges will reduce the burden passed on to the customers and thus allow them to be more competitive against road operators. Also, in an announcement beneficial to container train operators, credit of input services will be allowed at 60% abatement rate, from 4.2% without credit to 5.6% with input service credit. Earlier train operators had to bear the burden after credit was withdrawn last year which could not be passed on fully due to competitive reasons. This will also encourage the trade to use rail linked ICDs.
Waterways and Shipping Tax
The focus on ports and waterways is welcome as well. It is expected that construction will begin on Greenfield ports in the east and west of the country. Simultaneously, inland waterways will be developed further to facilitate commerce. However, one negative from the budget is the government’s proposal to impose a 14% service tax on shipping companies importing goods. The goal may be to encourage the Make in India initiative but the policy may be a little too protectionist at a time when there is evidence that international trade is good for the domestic economy.
Airports
The government has also vowed to refurbish and revive airports that are underserved. Over 160 airports currently fall into this category and following through on this initiative would improve regional connectivity across the nation. It is difficult to say exactly what scale of impact this will have on the logistics sector since most goods are still transported by road or rail. But we can be assured that it would only be an improvement on the existing state of things. The reach of companies operating in the logistics sphere would increase if the logistics sector sees transport by air as a viable option.
TAX relating to logistics, GST – Notable Absentees in Budget
The budget was not clear on taxes as they would apply to the logistics sector. The GST and its onset are pressing concerns that could have been addressed by the FM in his speech.
The multi-layered indirect tax system in our country is seen as a major impediment by every logistics service provider. GST will resolve the tax complexity with a single unified tax improving the ease of doing business in India and helping drive growth within the sector. Faster implementation of the Goods and Services Tax will still be the expectation of the sector.
The GST will result in many improvements. The first is the most obvious – a faster supply of goods and a quickening of delivery times. Having a unified tax regime will enable logistics players to deliver goods efficiently and will optimize the delivery time. It is estimated that the distribution cost will see a significant drop by 10-15%.
The logistics industry is highly fuel intensive and its operating cost is largely dependent on the petroleum prices.
Currently, the state government levies VAT and other taxes on transaction of crude oil and petroleum products which increase the overall trading cost, making the independent storage and trading business unviable. Implementation of GST will be welcome for logistics companies as they would be able to avail credit for the petroleum used.
More clarity would be appreciated on the taxes relating specifically to logistics in the coming few weeks.
Way Forward for the Logistics Sector
While the logistics sector is growing in the country, the industry feels many contentious issues remain unclear, such as the clear definition of supply, supply chain management through warehouse engineering, credit allowance during the transition phase, classification of goods and services under GST, etc. It will be ideal if a meeting with the key stakeholders of the logistics sector including the decision makers from the government can sit together and address these concerns before the roll out of the GST. This could help in mitigating discrepancies in bringing a well thought through tax reform. This would bode well for the development of the industry going forward.
(The author of the article is Pisipati SS Prasad, President, Apollo LogiSolutions)
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