GST for the transportation sector

 

GST for the transportation sector and the commercial vehicle industry will dial significant changes.

Story by: V G Ramakrishnan

GST would have rolled out by now, not relenting to the rising clamour for deferring it by a few months from a wide range of industries, and the banking sector. Apart from the deadline to implement GST, much has been discussed about its impact from the product taxation point of view; from the inflation point of view, and from the GDP growth perspective among others. The transition to the new tax regime under GST is likely to have a neutral or slightly positive impact on the commercial vehicle industry. Primary benefit would accrue from the removal of cascading taxes. Experts from diverse fields are of the opinion that GST in its current form does not differ much from the tax it will replace in terms of complexity, the number of tax slabs, and the huge burden of increased paper work.

With close to 60 per cent of the GDP contributed by the service sector, India in 2017 is largely a service driven economy. Manufacturing accounts for 25 per cent of the GDP. With GST simplifying a multitude of taxes on manufactured goods, compliance burden has increased significantly on the services sector, including the transportation sector. If the existing system requires service providers to pay service tax at a flat rate and file returns twice a year, under GST, the number of forms that are required to be filled increases to 37 in a year. This will lead to an increase in the compliance costs. Service organisations that operate in multiple states will have to register in each state that they operate in. This would be necessitated by the complex structuring of GST into Central GST and State GST. Many believe that GST is VAT 2.0 with improvements thrown in for good measure.

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GST, there is no doubt, is a game changer. Whatever may be its shortcomings as of current, it is a game changer since it creates a single market with uniform tax rates across the country. This singular change has the potential to have a wide ranging impact on the transportation sector. It also has the potential to have a wide ranging impact on transport companies and truck manufacturers for years to come. GST is not the largest transformative tax legislation to either transform or disrupt the Indian economy. For the transportation and commercial vehicle industry, GST is expected to bring about a significant change. Changes that would broadly focus on the following factors: sales volume, segmental shifts, ancilliary businesses transitioning to the organised side, and OEMs developing strong positions and revenue streams. Changes would also broadly focus on factors such as the transformation and consolidation of the transportation industry. If and how the purchasing power of large fleet operators can be increased, and the impact on brand pofitability among others.

Warehouse transformation

The imminent change GST will drive is the redesign of warehouse network. Historically companies operated warehouses in various states to avoid multiple taxation. These warehouses were in many cases sub-optimally designed. They were used only to add additional costs across the supply chain, both in-bound and out-bound. With GST doing away with the need to maintain warehouses across states, manufacturers are quickly reorganising warehouse locations by shutting down sub-optimal facilities and consolidating into larger spaced facilities. In many cases organisations are cutting down the number of warehouses they have had by more than half, or by one third of their original network strength. Companies in high velocity inventory turns sectors may still continue to operate with many warehouses since their requirement is demand driven than being tax policy driven. The outcome of such rationalisation is expected to result in lesser yet larger warehouses that are markedly automated.

While it is likely that many companies will actively create or enhance warehouse closer to the manufacturing location as this will increase their ability to stock and service low volume products and improve efficiency, the impact of this reformation in warehouse network will impact transporter route plans, frequency of routes and vehicle tonnage requirement. As more goods are transported to larger stock holding warehouses, transporters will require higher tonnage trucks since the probability of corporates transforming to full load trucks over partial loads will be high. This trend is expected to increase demand for higher tonnage trucks in the next two-to-three years. Commercial vehicle manufacturers can expect a further acceleration of growth in the segments above 25-tonnes.

New routes will emerge as companies relocate warehouses to lower cost locations; locations with larger land availability. Market access and costs in balance will also play a role. This change will over time lead to the creation of a hub and spoke model. Markets particularly in East and parts of North India (like Punjab, Haryana, Himachal Pradesh, J&K and Delhi) are likely to move faster in creation of hub and spoke models. Over the long term, vehicles with less than two-tonnes will predominantly serve last mile connectivity. Vehicles in the four and 10-tonne segment (LCVs and some ICVs) will serve as a connection between the hub and spoke. Vehicles over 25-tonnes will serve as a connection between manufacturing locations and the hub.

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Since the transportation industry operates on the basis of growth by tonnage, higher economic growth may not necessarily translate into higher volume growth for truck manufacturers. Segmental shift to higher tonnage will be evident over the medium and short term as the market adjusts to a structural change. From a freight stand point, demand for larger trucks could push freight rates up, and until the market reaches a balance. As the size of trucks increases, ticket size of trucks will grow. The ability of transporters to invest in business will rise too. While service debt could affect fleet acquisition plans, it coupled with the implementation of Bharat Stage IV emission norms will increase vehicle prices significantly. It is fairly established that the cost of BSIV upgrade will be significantly higher (as a per centage of the product cost) in lower tonnage vehicles compared to higher tonnage vehicles. The combined factors of emission upgrade and GST could churn the transport segments. One possible scenario that may emerge is of large transporters increasing their grip on first mile. Medium-sized operators could operate predominately in the hub to spoke segment, and small and individual truckers operate the spoke and last mile based on their financial capability. Transporters could increase their focus on niche segments, which require particular vehicle type to optimise the balance sheet.

Supply chain and vendors

GST is expected to drive changes in the business model across sectors. The transportation sector will have to evolve quickly. Two aspects of GST, chosen as examples, provide an indication of the changes that will sweep the transportation sector. First, the score system – similar to credit rating scores provided for each registered entity, will reflect an entity’s adherence to tax system, process and procedure. Corporates and companies can choose who to contract transportation based on the scores. As GST works on the principle of input tax credit, only those vendors and supply chain partners that file returns, will attract business. Transporters will have to maintain clean books of accounts and refrain from tax avoidance to avoid the risk of losing business. Companies and corporates looking for input tax credits will choose vendors that adhere to the new tax regime. GST is ushering in an era where market will regulate tax payment practices. Second, is the e-way bills. e-way bills will have an impact on the way transporters function. In this regard, GST is creating a digital foot print of each transaction and transport. Every e-way bill will have a certain period of validity. Transporters would be required to complete the delivery within the stated period. This will act as a huge deterrent for transporters, market load operators and small transporters in particular, against delay in delivering the cargo. A new e-way bill (from the consigner) will have to be generated beyond the validity period. Transporters will need to evolve their business practices. GST will call for a change of mind-set.

Organisational change

The prime objective of GST is to bring more and more transactions under the tax net; to increase transparency and compliance. The threshold for companies to register for GST has been lowered to Rupees-two million per annum as compared to Rs.10 million per annum limit in the past. Companies that were exempt from tax will now come under the tax net. This has the risk of making their products more expensive, and less competitive, as compared to the products produced by large-size organisations. The economy on the whole, is likely to get more organised. With increase in competition, smaller sized organisations are likely to ‘professionalise’ their operations, and grow to scale or exit. This trend is expected to play out among transporters as well. Transporters are also expected to engage in business transactions with vendors that are organised. This will enable them to benefit from input tax credit. While the current practice of consigners paying the tax on transportation will continue under GST, transporters that provide additional services will eventually charge GST and take credit for many input items like lubes, insurance, and tyres among others. Some of the services offered by roadside service providers like tyre retreading, repairs and maintenance are to come under the GST net. They will thus move up the value chain as GST compliant enterprises. The velocity of this movement will increase after the government brings petroleum products under GST. With increasing complexity in trucks, truck manufacturers can look at an increase in maintenance contracts, increase in the quantity of vehicles serviced, and at authorised service points.

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Transformation long-haul

GST transformation is about change in money (tax reform), matter (business process, model) and mind (compliance). Rather than an overnight transformation, it will take time. Evidence of change will emerge only in the next 24 to 36 months. Any expectation of a quick change will lead to expectation mismatch and disappointment. GST entails a long-haul. It entails a long-haul journey for the transportation and commercial vehicle industry to realise the benefits. With GST the transportation sector and truck makers are embarking on a journey that will lead to a significant improvement in productivity, cost efficiency and growth.

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V G Ramakrishnan is the Managing Director and Partner of Avanteum Advisors.

Impact of GST on CVS

GST would have come into play by the time this copy will hit the stands. Turning India into a unified common market, albeit with four slabs, GST for CVs effectively translates into a tax bracket of 28 per cent for trucks, not fitted with lifting or handling equipment, of the type used in factories, warehouses, dock areas or airports for short distance transport of goods; tractors of the type used on railway station platforms; part of the foregoing vehicles, including people movers for the transport of ten or more persons including the driver, and motor vehicles for the transport of goods (other than refrigerated motor vehicles). The 28 per cent GST tax slab also applies to tanks and other armoured fighting vehicles, whether or not fitted with weapons, and parts of such vehicles. Trailers and semi-trailers; other vehicles not mechanically propelled; parts thereof (other than self-loading or self-unloading trailers for agricultural purposes and hand propelled vehicles (hand carts, rickshaws and the like for example) fall under the same slab as well. Fork-lift trucks other than work trucks fitted with lifting or handling equipment also come under its ambit. Special Purpose Vehicles (SPVs) like breakdown lorries, crane lorries, fire fighting vehicles, concrete-mixer lorries, road sweeper lorries, spraying lorries, mobile workshops and mobile radio logical units have also been classified under the 28 per cent slab rate. Cranes (including cable cranes; mobile lifting frames, straddle carriers and work trucks fitted with a crane) have been slotted into the 18 per cent GST tax bracket. Tractors (except road tractors for semi-trailers of engine capacity more than 1800 cc) have been slotted in the 12 per cent tax slab. Agricultural tractors are claimed to have been slotted in the 18 per cent tax slab. The 12 per cent slab also applies to electrically operated vehicles. Biodiesel and mixtures thereof, not containing or containing less than 70 per cent by weight of petroleum oils and oils obtained from bituminous minerals are slated to be levied with 18 per cent GST. This slab will also apply to refrigerated motor vehicles. Pneumatic tyres, of rubber used in buses or lorries, will be charged at 28 per cent. These include retreaded or used tyres, flaps and inner tubes.

 

Impact of GST on CVS

GST and the CV industry

The GST Council has finalised a rate structure of 28 per cent for truck and buses. It is the same as cars, motorcycles, mopeds, personal aircraft and luxury yachts claimed an industry expert. According to an industry source, that smaller buses and vans with a capacity to seat 10 to 13 people will attract 15 per cent cess besides 28 per cent tax. Opining that GST for CVs will be neutral, the source drew attention to three wheelers, which are expected to witness a marginal increase in prices due to the additional National Calamity Contingent Duty (NCCD) levied. Against the current 27.5 per cent (Excise Duty and VAT) tax structure, that the tyres attract under GST they will attract 28 per cent duty, an increase of 0.5 per cent. ICRA in its report has mentioned that the overall tax incidence for the industry will remain neutral. Said Subrata Ray, Senior Group Vice President, ICRA, that the total tax incidence relating to inputs is estimated to increase since GST rate for input components is fixed at 28 per cent, higher than the current taxation structure. However, the manufacturer can claim input at credit. The fixation of GST rate of 12 per cent on tractors would allow OEMs to take credit of the cumulative input duties and taxes. Total tax incidence would thus remain at similar levels, and its implementation for the tractor industry would be neutral. Feared an industry expert that any benefit that the GST may offer will be lost to countervaling duties levied by respective state governments in their pursuit for revenue. He cited the example of Maharashtra, which has levied, not once but twice, countervaling duties on petrol. Countervaling duties may never be reduced or abolished he said, and instead increased over time in one form or the other.

Cab aggregators and buses fail to figure in the GST final bill?

Cab aggregators and buses carrying more than 10 people have escaped cess under GST, claim industry sources. They cite the four bills for the proposed GST regime, which were recently introduced in the lower house of the parliament by finance minister Arun Jaitley. Introduced as money bills, which do not require the nod of the upper house of the parliament, the omission of cab aggregators comes as a surprise to many. It has perhaps to do with the presence of just two major players, Ola and Uber. In the case of buses carrying more than 10 people, the omission from cess is expected to provide some relief. Buses, according to industry experts, currently attract an excise duty of 12.5 per cent and a Value Added Tax (VAT) of 12.5 per cent in most states. Vans carry an excise duty of around 24 per cent and a VAT of 12.5 per cent.

GST and transport industry compliance

GST, which promises to be an ambitious tax reform, may not ease the compliance burden or improve the ease of doing business claim industry sources. They point at provisions in the final draft of the GST law to get reluctant states on board. Revision of GST orders for three years, permitting officials to check vehicles in transit, levy of up to 2 per cent tax collected at source on e-commerce marketplaces and the requirement of service providers to register in every state, the sources point out, are provisions in the draft law that may not ease the compliance burden or the ease the prospect of doing business after all. Some of the provisions, he claim, were included upon the insistence of states, and despite severe opposition from industry. Many provisions in the draft GST law approved by the GST council may end up increasing compliance burden and bring back inspector raj. Industry sources claim that the GST law retains provisions present in the value added tax (VAT) where-in the taxmen can revise orders for three years. These powers will mean cases drag on for a long time, they add. The provision would also allow tax authorities to check vehicles in transit. Though transporters will be issued one single e-permit electronically by the goods and services tax network, the clause is said to permit vehicle checks at the toll post.

Taxi aggregators to register under GST?

Ola to tap inter-city cab market

The government is known to have come out with a comprehensive document on taxation rules and procedures for various sectors, including the taxi aggregators under the Goods and Services Tax (GST). Over 500 questions compiled in the form of Frequently Asked Questions (FAQ), the Central Board of Exise and Customs (CBEC) is known to have covered registration, valuation and payment, scope and time of supply, refunds, seizure and arrest among other issues. Accordingly, taxi aggregators such as Ola and Uber will have to register under the GST regime and are claimed to not have been granted any exemption from the prescribed threshold limit. The FAQs based on model GST law could however be changed post a deliberation with the respective state governments.

GST roll out only next year?

A report from the global financial services firm HSBC has attempted to put an end to uncertainty surrounding the implementation of Goods and Services Tax (GST). A long awaited tax reform, which is expected to bring about transparency in taxation and simplify the taxation procedure that currently prevail, including some that lead to double taxation, GST, the HSBC report said, could be passed in 2016 and rolled out in 2017. The report credits BJP government for having made changes to make the piece of legislature acceptable to other parties who have opposed it thus far.