Warehousing may undergo a mega change under GST

As the three-day meeting of the GST council gets underway from the 18th to 20th of October 2016; all eyes would be on the final GST rate. When the Subramanian committee had submitted its report in Dec last year it had made a recommendation of 17-18 per cent as the standard rate for most of the goods and services. Certain essential commodities were likely to have a lower tax rate of 12 per cent while a sin tax of 40 per cent was put forth for items like pan masala, aerated beverages and luxury cars. Deciding the GST rate might not be a very easy and the Finance minister has already taken leverage till November 22nd to build a consensus on all the issues with the council.

The month-long winter session of the parliament will begin on November 16th and the government has its hands full with the process of getting the GST laws passed in the run-up to the GST implementation from April 2017. With the deadline closing in fast the industry and businesses are going to see a lot of change and consolidation. This is particularly so with the industry and trade which had built a number of warehouses all over the country to avoid duplication of taxes.

The e-commerce industry also has a dependence on warehouses for having a smooth flow of goods to the customer points. Most of the e-commerce, automotive, FMCG, and pharmaceutical have either leased the warehouses or constructed their own. These manufacturers may not feel the need to renew the lease agreements or may go in for fewer warehouses. The preferred interest in having large warehouses may be in prime locations like Delhi, Mumbai, Kolkata, Chennai, Bengaluru, and Pune etc. The new smart cities may also become the hotspot warehouse destinations of the industry. The thrust by the government on the freight corridors and industrial corridors will also attract manufacturing industry and its warehousing.

The sizes of the warehouses may jump to about five times the existing ones as the industry may find economies of scale in operating large warehouses but in lesser numbers. On the other hand, the companies may prefer to ship the products directly to customers or distributors rather than stocking them. The supply chain cost will also reduce substantially due to inventory reduction.

With all these changes taking place, there would be warehouses that may become redundant. However, these are likely to be lapped up by the smaller players or may be converted to offices or residential complexes. The consolidation of the warehouses is going to be a reality as the GST implementation draws near. The focus would be on having the warehouses near the manufacturing hubs. This will help in cutting the transportation costs and improve supply chain efficiency.

The warehousing sector may witness a growth in the coming years but it will be limited to select cities and manufacturing hubs on the industrial freight corridors. The multiple warehouses maintained by the industry in a number of state locations may vanish and get converted to other real estate options. The clearer picture will emerge as the GST laws and policies are approved and released in the public domain.

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