At every single Automotive Megatrends India commercial vehicle conference, one issue has been raised over and over by industry leaders from truck manufacturers, suppliers and logistics providers: the need for GST.
Yet while GST in India has been most eagerly awaited by the industry, it is no closer to implementation now than in 2007, when a committee was established to design a model and to set up the back-end processes necessary for GST implementation. With a new government, however, could things be about to change?
The current situation
The Goods and Services Tax (GST) is essentially a tax which will replace all indirect taxes levied on goods and services by the central and state governments in India, and is being seen as the next logical step towards a comprehensive indirect tax reform in the country. At present, the range of taxes in force includes Central Sales Tax, State Sales Tax, Octroi (at the city level), Entry Tax (for entering into states) – and the list goes on.
So how exactly will GST benefit India’s CV and road freight segments, and more broadly, the country’s economy itself? Taxation at a national level, rather than by each individual state, will result in more efficient cross-state transportation, smoothing the paperwork for road freight companies, and bringing down logistics costs.
At present, each of India’s 28 states taxes goods that move across their borders, at different rates. As a result, freight that moves across the country through various states is taxed multiple times. Worse, there are long delays at interstate checkpoints, as state authorities review and examine freight, and apply the relevant taxes and fees.
According to EOS Intelligence, truck delays currently average five-to-seven hours at interstate checkpoints. As a result, a 2,137km trip from Delhi in the north to Chennai in the south typically takes seven days, implying an un-inspiring speed of 12.7 kph. Owing to these delays, and traffic jams, Indian trucks average 80,000 km per year, compared to 400,000 km in the US.
Major reform
65% of India’s freight is moved by road, a fact which leads EOS Intelligence to see GST as critical for India. The planned GST system seeks to replace around 15 state and federal taxes/tariffs, for a single tax at the point of sale. According to the firm, GST could be the single biggest reform since India’s pro-market reforms in 1991.
“At a macro-economic level, it is forecast that implementation of GST alone would add 1.5-2 percentage points to the GDP growth rate, and could lead to an economic gain of as much as US$517bn,” says Manmeet Malhi, Senior Project Manager, EOS Intelligence.
Conversely, with close to 2.5 million trucks in India, the non-implementation of GST has resulted in a significant portion of India’s GDP remaining on the country’s roads, on average, for 15 days, unutilised. This makes it the most expensive transportation in the world. In fact, says Raghav Himatsingka, Director of Indian logistics provider, Ideal Movers, the complicated tax structure in India means many logistics decisions are taken based on the tax regime rather than operational efficiency.
According to Rakesh Batra, Partner and Sector Leader Automotive at EY, “The freight transport industry is highly fragmented, with operators facing increased competition, lower profitability despite an increase in freight rates, increased fuel costs and the continued heavy administrative burden due to an array of indirect taxes. If we factor in the proposed regulations like the end-of-life vehicle policy being advocated, the impact on the freight transport by road will be even more severe at least in the short run.”
New political regime, new tax regime?
Given that the concept of GST has been discussed for a good many years now, there is renewed interest and hope that it will now be implemented thanks to the massive upheaval in the country’s political scenario in the recent federal elections. The Bharatiya Janata Party (BJP) won with a clear majority, resulting in the charismatic and controversial Narendra Modi being appointed as the 15th Prime Minister of India.
Modi, previously the Chief Minister of the state of Gujarat, is known, among other things, for a pro-development, pro-business stance. The country now expects its new Prime Minister to deliver on his election promises. Among the various reforms expected of the new government is GST.
“GST was first discussed in 2006 and a launch date was tentatively set for 2010,” observes Abdul Majeed, a Partner at PricewaterhouseCoopers in India. “There has been a delay of over four years now for several reasons. However, there is a need for consensus both at central and state government levels for this to be implemented. Having won by a majority, the incoming government may take up this long pending tax reform.”
According to Himatsingka, one of the hurdles standing in the way of GST implementation is a perception that this will cut individual states’ tax revenues. If this issue is addressed, he believes there should be no problems in implementation.
“There is a lot of optimism from the new government because it’s the first time in 30 years that we have a single party majority in the parliament, so they are expected to take strong decisions,” says Himatsingka.
The strong central government is also instilling optimism amongst CV manufacturers, that the long-awaited GST may finally be implemented. Heavy-duty CV manufacturer Asia Motor Works (AMW), an outspoken advocate for GST, not only feels the industry needs it to be implemented this year, but that and there’s every hope it of becoming a reality.
When, not if?
“We are hopeful of some significant progress in GST implementation, especially with a strong central government. Reimbursement to states on any revenue loss would be a bottleneck which will be overcome, resulting in some upward revision of overall rates,” says AMW’s President – HCV, A Ramasubramanian.
It’s more a matter of when, not if, says EOS Intelligence, with all major political parties acknowledging the benefits of GST. The question, then, is when it will be implemented. The previous government was not decisive in this regard, and, as a result, was unable to push through the necessary constitutional changes.
“However, it is believed that contentious issues such as revenue sharing with states had already been resolved,” explains Malhi. “And given that the benefits accruing from GST are now widely acknowledged across political parties, one has to believe that passing the bill in the parliament and implementing it latest by 1 April 2015, will be the priority.”
Modi’s views on GST will be interesting to observe. As Chief Minister of Gujarat, his government opposed attempts to pass the 115th Constitution Amendment Bill, 2011 to enact GST. The reason: concern over loss of tax revenue to the tune of Rs140bn (June 2014: US$2.35bn) per annum.
“Given the huge development wave the new government has promised, GST will be a natural first step to create a unified regime and to bring the various states together,” says EY’s Batra.
India stands to gain
In introducing GST, says the Confederation of Indian Industry (CII), from a general perspective, India stands to gain from higher economic growth, simplification of administration and improvement in compliance, a more secure and stable base for centre and state revenues, more capital investment through elimination of tax cascading, free flow of goods and services within the common market in India, promotion of manufacturing in India, and the removal of trade biases against goods manufactured in India.
GST’s benefits are expected to be felt by various sectors, from industry to central and state governments, trade and consumers. As GST is expected to reduce the overall production costs by 10-15%, this is expected to have a favourable impact on the prices of products; this will translate into increased demand for goods and benefits to consumers.
“With a unified GST across India, logistics and distribution costs could go down by almost a tenth,” observes Batra. “This will be a direct result of consolidation of stockyards and creation of hubs in arterial locations, rather than having to develop stockages in every state due to differing tax regimes. Provided octroi is subsumed under GST, the direct result will be administrative simplification. Key, however, will be deployment of systems and incremental changes that need to be brought to accompany GST, such as, for example, the ability to track the movement of goods.”
Road freight and truck manufacturing – two clear GST beneficiaries
Two segments that GST will impact significantly are road freight transport companies and CV manufacturers. AMW is hopeful that the implementation of GST will help progressively modernise trucking in India, bringing it a step closer to global standards.
“Progressively, the inventory on wheels should come down by four to seven days in a fairly short period,” says AMW’s Ramasubramanian. “The need for larger vehicles will go up and turnaround time will be a premium factor. Over a period of time, say 12 to 24 months, one should see an improvement in vehicle demand, especially in long distance haulage. During this period, the type of vehicles should shift to those capable of faster and safer travel.”
This will raise efficiency, believes Ramasubramanian. As a result, operating economics will start to move towards overall value added beyond just fuel and initial costs. While the Indian CV industry will still be producing cost effective vehicles, horsepower, turnaround times and on-road reliability will compete with fuel and EMI (equated monthly instalment – the way vehicle loans are spread across a loan period) as equally important operating factors. Both freight operators and manufacturers would have to progressively adapt to these realities.
Ideal Movers’ Himatsingka feels two things are likely to happen with the introduction of GST. “Firstly, since companies will not need warehouses in every state, we can expect large regional logistics parks to develop. Perhaps the government – both central and state – may also actively encourage logistics providers to invest in infrastructure to develop these hubs. This will lead to overall efficiency and reduction in costs for the entire system. It should also lead to modernisation of logistics infrastructure and greater collaboration for shared resources amongst non-competing companies/industries.”
Small fleets with fewer than five trucks constitute nearly two-thirds of the Indian truck market. If GST were to be introduced, says PwC’s Majeed, it would enable fleet owners to save money and upgrade their fleets, thereby increasing the efficiency of their delivery times across states.
“While the benefits of GST for freight companies and commercial vehicles are undeniable, it is tough to estimate how and to what extent it will translate into new vehicle registrations. Moreover, it is also plausible that demand might become concentrated on particular segments,” states Malhi.
However GST manifests itself, its impact on the economy as a whole is expected to be positive, and these two particular stakeholders look set to benefit directly.
