Dec 23, 2014 11:07 AM IST | Source: CNBC-TV18

GST will lead to lower costs; benefit supply chain biz: TCI

Vineet Agarwal, MD of Transport Corporation of India expects the supply chain business to grow at around 20 percent in FY15. He has a positive outlook for FY16.

With GST Bill being tabled in the Parliament, companies operating in supply chain business stand to benefit, says Vineet Agarwal, MD of Transport Corporation of India. But GST will have no direct impact on a company like his, which is a services company, since it is essentially a consumption tax and will have an impact on manufacturing.

However, the introduction of GST will lead to some reduction in expenditure, he adds.

He expects the supply chain business to grow at around 20 percent in FY15. He also has a positive outlook for FY16.

Going ahead, Agarwal sees a revival in the auto sector. Transport Corporation of India derives nearly 70 percent business from it. When compared to FY13 and FY14 he sees significant improvement in business.

Below is the verbatim transcript of Vineet Agarwal's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Sonia: If you can explain the specifics to us with respect to your own company. What is the current tax rate that you pay and if the adjusted tax rate for goods and services tax (GST) is at about 24-25 percent then how much of a benefit would companies like yours get?

A: For us the direct impact of such taxation is not there. We are a services company and not a manufacturing company, so we just pay service tax and income tax, but the impact that you mentioned is actually on manufactured products. So what will happen is essentially GST being a consumption tax, it would mean that today let’s assume that there is a company which has five production units and maybe 25 warehouses across India because of saving tax, saving the central sales tax they will start reducing these numbers of warehouses, so instead of 25 warehouses they might have 15 warehouses. Therefore, the distribution matrix will change from five factories to 15 warehouses which would essentially mean that the size of these warehouses will increase essentially reducing the overall inventory but concentrating that inventory at several locations. So a lot of changes will come from supply chain perspective for manufactured products with GST coming in.

Latha: Saving is in terms of number of warehouses. Does it impact the amount of goods you will move?

A: The volume of movement will be the same because production is same, sales are same. It is just the volume is concentrated to certain locations. What would happen is those locations will become hub and spoke system, also the other thing that will happen is that you will possibly use multimode transportation and not just predominantly road transport as we do today but probably use rail cargo or even coastal shipping or as the government has been talking a lot about inland waterways. So various modes of transport would start coming into play more and more with a concentration of transportation being going to lesser number of locations.

Latha: Another puzzle for those of us who do not understand how these taxes are calculated is petroleum products. These are going to continue to remain a state subject, it is in the bill but it will be at zero rates from the center and it will be taxed by the states. How do you give input credit? It doesn’t come to you at all, don’t you have to provide input credit to anybody or claim input credit from anyone. If you were to do that how would you do it?

A: That is specifically clear because for us, we are going to buy wherever our truck goes and it needs fuel. We are going to buy fuel from that particular state and we are going to pay the state tax at that point because fuel is out of the purview but states are allowed to tax that. So as a company when we fuel, we will have to buy from that specific state and pay the local taxes. So in that sense it becomes a relatively simpler, not so complicated.

Latha: You don’t have to give credit to anybody or claim credit because it is an end product?

A: That’s right.

Sonia: To clarify, on cost basis for a company like yours there won’t be any dramatic change, any dramatic lowering of cost, right?

A: Our major cost structure is essentially fuel, trucks or lubricants, tyres. So some of these items where we are going to buy these products, there would be certain price reduction with lower inventory cost or lower cost of distribution. However, net-net cost should not change much.

Latha: What is your service tax and if under the GST at some point in time it is going to be brought on par with excise than yours would get higher?

A: It is assumed that it’s GST which is goods and services tax, so at some point it has to come through. Whenever we get tax higher, it gets passed on to the consumer, so I do not see that as a major issue for a company like us but today the major issue is that road is at a separate tax structure, rail is at a separate tax structure, coastal shipping is at a separate tax structure. So just think about a company like ours that is moving cargo by rail from north India to a port in Gujarat, putting it on to a ship, taking it to Kerala, putting it on to a truck and delivering it to a consumer. So we are using three modes of transport but we are taxed three different ways, so that is the complexity that exist in business today that is what needs to be to make doing business in India easier.

Sonia: A word on your supply chain business and what is the prognosis is for the second half of the year or the new calendar year. It contributes about 30 percent to your overall business. What do you see as the way forward now, has things improved?

A: The business has been growing successfully at 20 percent plus in this year and this growth will continue. What I just talked about being the warehouses getting consolidated, large warehouse demand would come up and we as a company manage almost 10 million square feet of warehouse space. So divisions like supply chain would benefit. We have the ability to sell large spaces and manage large spaces; in fact a lot of clients today are coming to us with a post GST strategy. So we are coming and doing a whole network design study for them and pointing out where are the locations where they should have the warehouses. Therefore, divisions like supply chain would tremendously benefit from GST. We are also seeing a revival in the auto sector to some extent and since that we get 75 percent of our business from the auto sector in that division, we should see some growth there as well.

Latha: Tell us if there is growth, are things improving at the ground level, would you say second half compared to previous year’s second half will be much better?

A: Every year the second half is always better.

Latha: I am asking you if the economy is picking up, are you getting more business compared to the same time last year and the year before.

A: We are getting a lot more business than last year and I was saying that the inventory pick up has started to happen but it is not that much. It is more seasonal towards the quarter endings; it is not predominantly seen across all sectors. It is only there in a few consumer-driven sectors, not in the engineering sectors, not in the capital goods sectors.

Sonia: Currently a very small portion of your business comes from e-commerce but that is the big story over last six months. How much do you envision in terms of the e-commerce business over the next two-three years?

A: For us e-commerce is a bigger picture. For us e-commerce is not just that last mile delivery. We do a lot of the warehousing for a lot of e-commerce companies which is essentially the fulfillment. We do supplier management for the e-commerce companies. So for us the entire chain from supplier to warehouse management, fulfillment to final delivery is what we take care of and right now being two-and-a-half thousand crore company the sales is relatively smaller but going forward it would be a good portion of our business as well.

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