Tax and legal structure-A stumbling block for logistics in India

this is an article on the logistics sector in india submitted by me for the first evaluation with a hope of getting it published which i think will happen but not in my name..............sorry for the bad editing here not much time to make it perfect
hope it is nt bad to read

Synopsis

This article mainly deals with the legal and tax structure which is big hindrance to the logistics sector in India. These hindrances and procedural delays lead to an inefficient and ineffective warehousing system. This article will gives us an overview of the tax structure, legal procedure, the cascading effect due to tax and regulations and most important of all corruption the biggest problem plaguing the logistics industry.

Introduction

38% in raw materials purchasing and packaging, 16% in manufacturing, 7% in distribution, 30% in sales and marketing and 5% in net profit, so what are these percentages we are talking about? These are the amount of money a business process pays as taxes at each and every step of operations. Here we would like to concentrate on the first three processes majorly as they deal with logistics part. Here we see the multitude of taxes that a company got to pay for the same product from procurement till the sale of the product.

Logistics is an extension of the transportation system with emphasis to achieve a effective and efficient distribution system. There are various decisions that need to be made in an efficient logistics management say: product design, location, warehousing etc, but there are certain rules and regulation that govern these logistic service players in India. The objective of the article is to explain the implications of legal and tax procedures on logistics in India with special emphasis on transportation. The face of logistics sector in India is set for a sea change, when it comes to services India is already a world leader. When it comes manufacturing India is lagging far behind China but the scope of growth is very high. The number of third party logistics payers willing to enter India is very high but somehow the complicated procedures make life difficult for them in conducting their business process. As we move ahead we would look at the tax and legal aspect that govern the logistics process, the problems of corruption which plague the transportation sector, some new thought process put into place by the government which might prove beneficial for the service providers in the long run.

Tax structure in India

All these years a differentiated tax regime had been the bane of any business process in India. To explain each state had its own tax structure which made the process of setting up a business in one state different from setting up a business in another state. Taxes in India are of various kinds and various rates. The effect of applying so many taxes and with bureaucracy in India there are so many procedural delays that affect the working of the logistics service providers in India. There had long been calls for a national tax regime, now with the application of Value Added Tax the design of services that logistics companies in India provide would see a sea change because all intra state taxes would be neutralized and we would have one single common tax. The states too competed with one another by offering tax concessions for location of manufacturing or warehousing facilities. Therefore we need both the central and the state governments to work together on finding a solution to the problems. Having a differential sales tax structure brought in diseconomies of scale, though VAT had been implemented from 1st April 2005 failure to implement it throughout the state bought has seen that the problems related to tax exist even today. Other than this the logistics players have to face numerous other taxes, octrois, check posts, harassment by officials and due to this we have delays and high costs of operation. Value Added tax was introduced in India in the 1980s where every stage from manufacturing to consumption is taxed to the extent of value added in the stage. Before VAT was implied the taxes was collected at one single point and it was possible to evade taxes at a few places. It has taken 25 years for VAT to be completely implemented, the disadvantages of slow implementation has been companies have had to set up a large number of warehouses throughout the countries in order to escape the intra state taxes or the central state taxes. This has lead to an inefficient distribution system and not warehouses at strategic locations which would cut down cost and increase efficiency in the system as a whole. Despite implementation of VAT states find new ways of earning revenue. New ways of collecting money in the form of levy, rates, and cess are taken by the state governments. State sales tax for e.g. are levied in a state in diverse forms. When we go into much detail the state sales taxes are much more complicated than the wretched excise duty on manufactured products. There are so many plethora of other state taxes like Octroi in Maharashtra “as the saying goes why cut the hen that lays the golden egg” the Maharashtra government tends to ignore the call for abolishing the Octroi because for the Mumbai city alone it earns a whopping 4500 crores for the Birhanmumbai municipal corporation. Maharashtra is probably the only state where Octroi is applied to the whole state but different places in Maharashtra have different rates so it makes it even complex for the logistic service providers. Place Tax rates + processing charges for Octroi of .25% Mumbai 4.75%

Thane 4.25%

Pune 7.25%

Chinchwad 2.75%

Nasik city 4.25%

Adapted from http://www.frizair.com/

Then there are various taxes on the vehicles like tax on use of roads, ownership of vehicles, purchase of vehicles, usage of vehicles, entry tax into states and different motor vehicle tax structures in different states. This makes it even more complicated for operations in the country.

Cascading effect

Cascading effect is the main reason why the companies these many days asked for uniform tax structure. Let us take an example we have a finished products the company has to play the sales tax on sale of the finished goods, sales tax paid on raw materials, service tax paid on transportation and sales tax is levied on all taxes paid in the previous steps. The same thing happens with the logistics industry so they end up having about 20-50 distribution centers all over the country so as to avoid the cascading effect. This is actually a very high number when we compare it with the developed countries and China. This make up for an inefficient and ineffective system.

The Legal Regime

The legal regime is as complicated as the tax regime if not more. The plethora of laws that govern the system make it as much confusing. In India each state considers goods from other states as imports thus you have state government laws along with the laws enacted by the central government. The major sufferers in the logistics side are the truck operators as most of the laws are there to control them. The major areas where the truck operation are regulated are the quantity, quality, safety, price, labor, environment, regulation of brokers(they mainly arise due to corruption), regulation of axle load. This majorly related to the truck carriers and their operations. There are so many checkpoints and long queues at these checkpoints that make it tedious for the truck drivers, then there is the problem of corruption which I would touch upon in the next segment. The other regulation is the regulation of goods i.e. what kind of commodities is carried from one state to another. A commodity transferred may be a single commodity or a multiple commodity from a single from a single supplier to single receiver or multiple suppliers to multiple receivers. The problem here is a truck may contain a commodity which might be banned in one state but not in another thus the supply of other good is delayed. Most of the provisions in the regulatory regime for the consumer is unrealistic and difficult to follow. The trucking industry in India is also highly fragmented as they are completely unorganized the prices for the trucks are decided by a few players who form an unorganized cartel and the prices are decided. Logistics to third parties are soon becoming a solution with a large number of foreign players entering India but the legal structure for their entry is not really conducive. Types of permit for incoming and outgoing of goods in some states
states goods coming in Goods moving out Uttar Pradesh Form 31 Form 49 West Bengal Form 42 Form 48 Punjab Form 24A Orissa Form 32 Rajasthan Form 18A Form 18B (Data adaptedfromhttp://ashish.scm.googlepages.com/MicrosoftWordConceptPaperonGSTImple.pdf) Apart from these there are rules for good passing through the state like Form 51 in Rajasthan

Corruption in the trucking sector

According to a report by Transparency International India ranks 72nd in the list but with the trucking industry alone making upto 80,000crore it makes the index feel superficial. How many of us with motor vehicles or passenger vehicles have been caught by the cops and taken to the side and had some money frisked from us. It is no different to the truckers either for every kilometer they travel on a average they have to shell out 70 paise per kilometer. A rough estimate would to bring it to about an annual estimate of 80,000 crores. This is the extent of corruption in our country in the trucking services alone so when we get deeper we see corruption is one deep quagmire of problems for the logistics industry. The RTO and police authorites are the biggest sources of goodnesd trouble as they are the main enforcement agencies. The amount of forced stoppages that the truck drivers make takes upto 11 hrs of their time and this leads to delay in arrival of shipments. The amounts of harassments that the drivers have to face from the officials are one of the major irritants. Such attitude shown on the part of has seen the truckers engage the brokers for getting their work done from renewal, issuance of permits, truck permits, fitness certificates etc.

Conclusion

According to a world bank report released in 2007 India ranks 39th in global trade logistics, but for a major developing country don’t u all think it is pretty low. For a major so called developing nation 39th position is not a proper reflection that is to be given to the outside world. In India the average hours travelled in a month is around 250 hours whereas in Europe and America the average is around 800 hours, this leads to proper inventory management maintenance. The article was to bring forward the facts regarding legal and tax procedures in India which haunt the logistics players in India. The amount of procedures they have to go through to set up business and then follow the rules so tedious so as to dissuade any of the honest enforcers.. How application of VAT will help is an interesting point to see, hopefully the logistics players are definitely seeing light at the end of the tunnel. The confusing tax procedures atleast seem to end the legal procedure too should follow suit soon so as to make comfortable for a lot of players to enter the market and make it a more organized market.

References

Adaptations from www.frizair.com

A text book on logistics and supply chain management by G.Raghuram and N. Rangaraj

Private equity in shipping transportation & logistics in India, Vishal Sharma, Tuscan Ventures

Outbound logistics and local taxes, Janat shah & Balram Avittathur

http://ashish.scm.googlepages.com/MicrosoftWord-ConceptPaperonGSTImple.pdf

The Role of Transportation and Logistics in India: Emerging Issues and Prospects-Dr.S.Sriraman