8/2/2019 Gst Warehouse

1/4

8/2/2019 Gst Warehouse

2/4

Multiple warehouses, inefficient distribution

Besides these tax implications, complex state-wise tax structures have serious

repercussions on the manufacturers. Inventory and distribution decisions are based on

tax avoidance rather than operational efficiency. Accordingly, most manufacturersmaintain warehouses in different states to evidence movement of goods from one

warehouse to another to save on the CST. Also, quite a few entities set up warehouses in

locations like Pondicherry or Daman, often impractical from a distribution point of view,

as the CST rate at such locations were previously lower than the rates prevalent in other

states.

Typically, most large consumer durables or FMCG companies in India operate with 25 to

50 warehouses all over India, which is a very high number compared to developed

economies (less than 5-8) or even developing countries (less than 10-15) with similar

geographical expanse. This has severe implications on cost structure and operational

efficiency levels, which is ultimately borne by the end consumer either in terms of cost-

quality trade-offs.

8/2/2019 Gst Warehouse

3/4

Logistics industry looks to be upbeat the implementation of GST as this regime has

some tangible benefits instore for the industry.

Manufacturing sector in India is one of the highly taxed sectors in the world. A complex

and high taxation structure has the tendency to render products uncompetitive in the

international market or eats up large portions of the cost arbitrage available inmanufacturing set-ups in low cost economies such as India. For instance, the

manufacturing cost of most products in India is nearly half than in the west. But, the

incidence of multistage taxation i.e. customs duty on imports, central excise duty on

manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service

tax on provision of services and levies such as entry tax, octroi and cess by the State or

local municipal corporations and related costs such as loss of tax credit, complianceand litigation cost chip away this advantage to the extent of almost 50 per cent.

8/2/2019 Gst Warehouse

4/4

More sum total space & inventory requirement: It is estimated that if tax avoidance is

not a factor for deciding distribution network, the total warehouse space can be reduced

by 20-50 per cent immediately

Small & inefficient warehouses: Given the large spread of 4,000-10,000 sq ft

warehouses, the average size of a warehouse has remained small causing duplication ofoverheads and making it unviable for owners and operators to introduce racking or

automation. According to a broad estimate, scale economies start to positively affect

warehouses only when they are larger than 30,000 sq ft.

Distribution cost and inefficiencies: There are significant cost and inefficiency

implications of running a distribution network over a spread of 25-50 warehouses in

terms of smaller loads, smaller trucks, state boundaries being the determinant oftransportation routes.

Other Costs: High cost ERP linkages throughout the warehousing network to ensure real-

time visibility of inventory result in higher IT costs. Further, multiple handling across the

various layers of distribution and multi-layered compliance requirements result in higher

material handling and compliance costs.