_GST-regime bears fruit, warehousing sector witnesses signs of consolidation

The Goods and Services Tax (GST), regarded as the biggest tax reform in the history of independent India, was rolled out in 2017. It has replaced numerous central taxes such as excise duty, countervailing duty and service tax as well as state taxes such as value-added tax, octroi and entry tax, local body tax, luxury tax, etc. 

GST has facilitated the unification of the Indian market. Prior to the GST regime, same products were sold at different prices across state borders owing to want of uniformity in the tax structure. GST has helped eliminate these price differentials and thus created a level playing field.

Warehousing activities carried out for the sole purpose of avoiding tax have become redundant with the introduction of GST. Travel time for inter-state transportation has also come down significantly owing to the elimination of state entry barriers. However, the biggest advantage that experts attributed to the implementation of GST is the reduction in inventory, reduced inventory carrying costs and the consequently increased profitability. 

Further, GST has reduced the costs incurred on taxes and state permits. Both these savings (time and cost) are nullifying the need for multiple warehouses in different geographies and encouraging companies to consolidate their warehousing footprint across the country. 

However, contrary to the industry perception, warehouse consolidation will not be uniform across the board. Consumer durables (Fast moving consumer durables or FMCD) manufacturing companies foresee up to 40% reduction in their total number of warehouses. 

The fast moving consumer goods (FMCG) industry, on the contrary, has indicated a relatively smaller extent of consolidation in their warehouses. The only scope for consolidation in FMCG lies in their intermediate warehouses that fall in between factories and feeder hubs. 

In case of temperature-controlled warehouses, cold-chain companies have indicated that they are unlikely to consolidate on a large scale, at least in the next 3-5 years. Huge capital investments needed for building the temperature-controlled infrastructure is the primary bottleneck for such companies. 

Overall, the cost savings brought about by the introduction of the GST regime have been estimated to be in the range of 3% - 7% according to our interactions with industry experts. It is still early days to gauge the eventual impact that the consolidation wave in the warehousing industry will bring about.

Click here to know more: Research - India Warehousing Market Report 2018