13 Nov 13 How Goods and Service Tax (GST) will revolutionize warehousing in India

Supply deficit in warehousing in India is 120 mn sq ft – and growing

Till about a decade ago, warehousing in India was synonymous with a shed – four walls, no ventilation, no temperature controls and a lack of hygiene. A warehouse management system was essentially a man with a notebook keeping track of the inventory that came in and left the premises. Heavy losses resulted from a lack of modern warehousing facilities. Even today, a large part of warehousing continues to be unorganized with mostly sheds for storage. Due to the lack of modernization, the industry is now facing a huge gap between demand and supply. Our estimates reveal that a deficit of 120 million sq. ft exists in the sector. And this gap will continue to widen. This is mainly because demand for warehousing is expected to grow at a CAGR of 18% in the next 5 years – thanks to the incoming investment in the retail sector and increasing import-export activity in India.

 Source: ValueNotes Research 

High costs eating into warehousing growth

The underdevelopment of the sector can be mainly attributed to the high cost of entry – a direct result of the cost of real estate in India. Land is the primary resource in warehousing and the cost of land varies vastly between regions in India, leading to unequal development of warehousing across the country.

Adhoc taxes levied at the state and central level have further contributed to high costs of warehousing. This is the main reason why unorganized activity in the sector is flourishing. The only way to curb unorganized activity and bring down prices of warehousing is to unify the tax structure in the economy.

The silver lining: Goods and Service tax (GST)

The GST is a value added tax that will replace all other indirect taxes in India. One purpose of the GST is to make taxes destination-based rather than origin-based. Currently the supply of a product from the manufacturing location to the customer entails an excise duty, a VAT which could be imposed at state and central levels, and a central sales tax. In some states, there is also the additional burden of an octroi which is imposed at state borders. The flow of these taxes has been shown below;

Source: ValueNotes Research 

As compared to this, the liability of the GST will be about uniform across the board, thereby eliminating the cascading effect of taxes. It will reduce the price differences by making all regional tax liabilities equal. This will remove the cost difference between states and lead to a homogenous growth of warehousing across the nation.

As a result of reduced tax liability, GST will reduce the share of the unorganized sector in warehousing. Prices charged by the organized players will come down and reduce the price advantage that the unorganized warehouses currently enjoy. Thus, GST will level the playing field and create an equitable development of the industry across India. I believe that this one factor could drive growth of warehousing in India.

What should industry participants do?

According to our latest research report,  Warehousing Industry in India – 2013-17, the introduction of the GST will represent a boom in various industries and warehousing is no exception. Now is a good time to invest for players because they have an opportunity to increase profitability with access to markets or regions that were previously unviable. They can proactively invest in the industry.

Industry participants will need to look at their supply chain efficiency and ensure that competitive cost structures are put in place. This can be done in various ways – designing a multi tiered distribution network where there is specialization in certain functions (storage and inventory management) and some functions (software services, packaging, labelling) are outsourced. Another will be to partner with a 3PL logistics provider to ensure optimal utilization of resources. It is expected that the GST will roll out after the general elections in 2014. And this means preparations for the change must start right now.

After all, forewarned is forearmed.