The holistic and comprehensive growth of various sectors within an economy plays a pivotal role in the overall development of a nation. Among these sectors, the logistics sector stands as a cornerstone, facilitating the efficient movement of goods and materials. By encompassing a wide range of supply chain activities, this sector orchestrates the transportation of goods from origin to destination, includes warehousing and storage solutions, and ensures their timely delivery. Moreover, the logistics sector is responsible for generating numerous direct and indirect employment opportunities, further bolstering economic prosperity.
The Indian logistics sector, often deemed as the lifeline of the economy, holds a significant position, contributing approximately 14.4% to the GDP . Fueled by the explosive growth of e-commerce and hyperlocal delivery, alongside technological advancements, the logistics sector in India has witnessed steady progress. Furthermore, the government’s ardent support for an Aatmanirbhar Bharat and promoting indigenous ‘Made in India’ products have further propelled this growth. However, beneath the surface lies a harsh reality — the exorbitant logistics costs in the country present one of the most formidable challenges in realising the vision of an Aatmanirbhar Bharat. Currently accounting for around 13% of the GDP, these high costs render Indian-made products less competitive in the global markets, significantly impacting exports . The World Bank’s Logistics Performance Index ranking India at the 38th position comes as no surprise, highlighting the pressing need for substantial advancements in the logistics sector to reduce costs and unleash its full potential.
Intending to reduce exorbitant logistics costs and enhance India’s global logistics performance index ranking, the Indian government introduced the highly anticipated National Logistics Policy (NLP) in September 2022. The overarching objective of this policy is to catapult ‘Made in India’ products to international competitiveness in terms of cost-efficiency. Representing a transformative framework, the policy’s key building blocks lay the foundation for comprehensive reforms within the logistics sector. The fundamental pillars that underpin this landmark policy, poised to reshape logistics operations across the nation, are as follows:
- Digital integration system: This initiative involves the seamless digital integration of seven diverse departments encompassing road transport, railways, aviation, shipping, etc., resulting in an optimised logistics ecosystem with enhanced efficiency.
- Unified logistics interface platform: This initiative entails the consolidation and integration of all digital logistics services into a unified platform, simplifying operations for logistics firms, importers, and exporters alike.
- Ease of logistics (ELOG): This initiative guarantees streamlined logistics operations through enhanced transparency and accessibility, empowering the industry to address operational challenges directly with government agencies for prompt resolutions.
- Logistics human resources development and capacity building: This involves development of a comprehensive human resource strategy and implementation of diverse action plans to enhance skills within the workforce and cultivate internal capacity to address challenges within the sector effectively.
- Comprehensive logistics action plan: The comprehensive logistics action plan comprehends a diverse array of components, including integrated digital logistics systems, standardisation of physical assets, benchmarking of service standards, and the establishment of logistics parks, among other initiatives.
In addition to these endeavours, the government is actively pursuing various previously launched initiatives to empower and fortify the logistics sector. These involve a range of measures aimed at fostering growth, efficiency, and innovation within the industry. Some of those measures include:
- PM Gati Shakti Yojana: Launched by the government in the preceding year, this initiative endeavours to synchronise the planning and implementation of infrastructure projects across the country, with the primary objective of reducing logistics costs.
- Bharatmala project: “American roads are not good because America is rich, but America is rich because American roads are good” is a well-known quote attributed to John F. Kennedy, the 35th President of the United States . Recognising the pivotal role of road and highway infrastructure, the government of India is actively engaged in the ambitious Bharatmala project. This transformative initiative aims to establish a robust network of roads, highways, and expressways spanning the length and breadth of the country.
- Sagarmala project: To unleash the latent potential of waterways, the government launched the Sagarmala project to boost the performance of the logistics sector in the country.
The NLP, combined with the aforementioned government initiatives, is poised to deliver a significant impetus to the logistics sector, addressing its needs and fueling its growth.
Contribution of indirect taxation to the growth of logistics sector:
Indirect taxation has emerged as a crucial domain where substantial efforts have been directed towards strengthening the logistics sector in recent years. The implementation of Goods and Services Tax (GST) has yielded multiple advantages for the logistics industry, some of which are outlined below:
- During the pre-GST era, transporting goods via roads required prolonged waiting times at inter-state check posts for document verification and related processes. However, the nationwide implementation of GST has eliminated this requirement, reducing transportation time and ultimately lowering the average cost of logistics operations.
- As a nationwide tax, GST has alleviated the burdensome compliance obligations associated with multiple taxes such as VAT, CST, Octroi, and Entry Tax. Moreover, implementing the electronic e-way bill system has significantly reduced paperwork, bringing notable advantages to the logistics sector.
- The introduction of GST has brought about notable enhancements in the warehousing system in India as well. Implementing a unified tax regime has eliminated the need for maintaining warehouses in each operational state, resulting in improved inventory management and more efficient logistics operations.
Considering the aforementioned advantages, it is undeniable that the introduction of GST has emerged as a pivotal arena, with substantial efforts directed towards bolstering the logistics sector's growth. Consequently, this has yielded numerous advantages for the industry.
Nevertheless, it is imperative to recognize that certain challenges and deficiencies within the current GST legislation warrant thoughtful scrutiny. This scrutiny is crucial for creating a more favorable environment for the logistics industry and aligning it more closely with the overarching, long-term objectives of the National Logistics Policy.
Current challenges in indirect taxation for logistics sector:
While the implementation of GST has yielded certain advantages for the logistics sector, including elimination of inter-state check posts, extension of input tax credit time limits, introduction of anti-evasion measures, and simplification of compliance and reporting requirements, these measures alone fall short of fully harnessing the sector’s potential and providing comprehensive support to NLP. Outlined below are some of the challenges that need to be addressed:
Petrol and diesel constitute the primary raw materials for the logistics industry. However, the taxes levied on these fuels, such as excise, VAT, and CST, fall outside the purview of GST. This situation not only burdens the industry with additional costs but also disrupts the input tax credit chain, ultimately impacting the sector’s competitiveness.
- The industry has been persistently receiving numerous notices from authorities pertaining to various periods, asserting insufficient reversals by companies and demanding payment for the shortfall. Despite Explanation 1 to Rule 43 of CGST Rules, 2017, which explicitly excludes ocean exports (specifically notified as exempt supplies under GST up to September 2022) from the definition of exempt supplies for calculation of ITC reversal as per Rule 42, the authorities are disregarding this provision when determining the amount of ITC reversal. This discrepancy has resulted in a surge of litigations for the logistics sector.
- In the logistics sector, it is common to observe profit-sharing arrangements between an Indian company and its overseas-related entities. Under these arrangements, the services that the Indian entity should provide to its customers are actually carried out by the related company, and the Indian company shares a portion of the profit from such transactions with the related entity. The issue that arises pertains to the treatment of the input tax credit (ITC) in this scenario. While the Indian entity fulfills its tax obligations by discharging the applicable amount of tax under the reverse charge basis and claiming the ITC for the same, the question remains whether this ITC should be considered as a common ITC for both outward taxable supplies and exempt supplies, and accordingly accounted for during ITC reversal, or if it solely pertains to the outward taxable supplies and should not be considered during reversal.
- As per the GST legislation, for a person to be classified as a Goods Transport Agency (GTA), they must issue a consignment note for the transportation of goods by road. Services without the issuance of consignment notes do not qualify as GTA services under GST. However, the GST authorities consider all transportation services as GTA services, disregarding the requirement of a consignment note stipulated by the GST law. Consequently, they demand additional GST from companies under a reverse charge basis, resulting in a rise in litigations for the logistics sector.
- The input tax credit for works contract services procured during the construction of warehouse/multimodal logistics parks is presently prohibited under Section 17(5) of the CGST Act, 2017. Consequently, this disallowed credit is subsequently passed on to end customers, thereby escalating logistics costs for companies.
- The taxability of ocean imports under the reverse charge basis has been a persistent and contentious matter for the logistics sector. In a significant ruling last year, the apex court, in the case of Mohit Minerals, ruled in favour of the industry by stating that tax payment under the reverse charge mechanism (RCM) is not mandatory for ocean imports under CIF contracts. However, the industry lacks similar clarity regarding FOB contracts, leaving room for uncertainty.
The National Logistics Policy of India holds great promise for transforming the logistics sector, fostering efficiency, competitiveness, and sustainability. In order to fully harness its complete potential, it is imperative for the government to proactively address the challenges and gaps in the current GST regime pertaining to the taxation of logistics services that otherwise, if left unattended, could act as potential bottle necks in the effective realization of long term goals outlined within the policy framework. By implementing necessary reforms and creating a harmonious GST framework, the government can empower the NLP to effectively achieve its goals and objectives, unlocking the true potential of India’s logistics sector. The government must take proactive action and create a favourable environment that enables the logistics industry to thrive and contribute to the growth of the nation’s economy.
This article first appeared in Taxmann on 06 September 2023.