India’s warehousing market after GST – Industry perceptions

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More than 63% of the respondents felt that the implementation of the GST would be positive for their overall business operations in India.

While India is still in the process of finalizing the blueprint of its most important tax reform, more than 160 nations have already adopted a unified indirect tax structure. In Asia, countries such as Indonesia, Thailand, Singapore and the Philippines adopted a Goods and Services Tax (GST) during the 1980’s and 1990’s, creating an effective tax system with a comparatively lower cost of administration and collection.

Due to the multiple tax rates at the state and city level, goods often spend a substantial amount of time in transit. This increases the overall cost of transport and makes the system inefficient. The removal of various federal tax barriers and creation of a common market will improve supply chain efficiency and attract more FDI. Stipulations in the proposed law are expected to result in better tax conformity, while removing the cascading effects of the current tax regime. For Logistics companies, once the GST is implemented, documentation will reduce, resulting in an improved turnaround time and client outreach. The GST will make doing business in India tax neutral, irrespective of location. For a warehousing operator, investment decisions will no longer be dictated by the comparative tax advantages of various states, thereby enabling them to make decisions based on supply chain – efficiencies.

To gauge the impact the GST will have on India’s warehousing industry, CBRE conducted a survey among the leading warehousing space occupiers in the country. Survey respondents included leading corporates in sectors such as third party logistics (3PLs), e-commerce, engineering & manufacturing, fast moving consumer durables and non-durables, pharmaceuticals and retail. Approximately 63% of respondents were domestic corporates, while the rest were headquartered abroad.

The survey threw up some interesting results. More than 63% of the respondents felt that the implementation of the GST would be positive for their overall business operations in India. The hope is that operating costs will decrease in the post-GST era which will enable them to consolidate their smaller facilities into larger ones and expand their footprint around major consumption centres.

Approximately 45% said that their cost of warehousing operations is likely to decline once the GST comes into play, while around 25% were cautious and felt that it is too early to assess the actual impact. However, the majority of respondents said that they are already prepared for the introduction of the GST and would be able to align their business to the new regulations.

The survey found that approximately 65% of respondents believe that they will need a minimum of 3 to 12 months to align their existing business strategies with the new tax structure.

Among the respondents, location currently is the most important factor for consideration when leasing warehousing space. This is followed by the real estate cost of leasing space in a particular state/city. While currently location decisions may also be influenced by tax-incidence; however, post the implementation of the GST, most warehousing occupiers are expected to take decisions purely on the basis of reach to market, quality and size requirements.

According to the survey, the most likely strategy for warehousing portfolios in the post GST era is that of consolidation followed by expansion. Close to 28% of respondents said they would consolidate, while 23% stated that they would further expand their operations across the country.

Close to 52% of survey respondents currently have multiple warehousing facilities in one state / city. When questioned, 28% of respondents said this is the most effective way to operate given the multiple local taxes involved. Close to 38% of companies surveyed also feel that this is the most suitable mode of operation based on their current business model. However, in the post-GST scenario, the concept of a mother warehousing hub for a region supplemented by spokes is expected to become more popular. Around 11% of companies surveyed said they would prefer to adopt the hub and spoke approach in the post-GST regime, compared to only 6% now.

While understanding respondents’ preference across various states, approximately 38% of respondents said they will continue to expand their footprint across states such as Tamil Nadu, Karnataka, Haryana and Maharashtra. Approximately 27% will consolidate their operations, while 26% are likely to retain their existing footprint; however, approximately 8% would downsize existing footprint in states such as West Bengal, Uttar Pradesh and Andhra Pradesh.

Once the GST comes into play, the focus of players is likely to be on supply chain efficiencies which will result in consolidation of warehouses. This will result in increased demand for larger, better quality warehouses thereby providing an ideal platform for the emergence of large scale nationwide players. This growth in demand will spur supply of quality warehousing, which is likely to lead to emergence of new warehousing hubs as well as expansion of the existing hubs.

Unlike most reforms that tend to be met by resistance, our survey reiterates the fact that most warehousing players view the implementation of GST as a positive move. While some may argue that the reform may prove to be detrimental for the smaller players, in our opinion it is likely to allow these smaller players to develop better quality assets or enter into joint ventures with larger players. On the whole, the reform will be in the larger good of the sector resulting in the emergence of better quality, investment worthy assets.

Source: http://retail.economictimes.indiatimes.com/news/industry/indias-warehousing-market-after-gst-industry-perceptions/57270704

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