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India's NLP - What to expect from Customs, GST & Income Tax perspective?

SEPTEMBER 20, 2022

By Dr Shrikant Kamat, Exec. Director, Bhuta Shah & Co. LLP, Chartered Accountants

INDIA's Prime Minister, Mr. Narendra Modi, unveiled the country's National Logistics Policy (NLP) on September 17, 2022 (incidentally also happens to be his birthday). Though the primary objective of coming out with a Policy on Logistics certainly is to boost both Ease of Doing Business as well as Ease of Living by reducing the logistics costs across the country, however, while achieving this objective, the Indian Government also wants to simultaneously achieve atleast a 10 percent reduction in logistics cost and a 5-8 percent increase in exports. Additionally, through the NLP, the Government also intends to further enhance the size of the country's logistics sector from the present day USD 160 Bn. to USD 215 Bn. in another 2 years' time. 1

Constituents of Logistics

Trade logistics stands on five main pillars, namely -

- Storage, warehousing and materials handling;

- Packaging and unitisation;

- Inventory management;

- Transportation; and

- Information & control

To ensure that business performance is optimal, any enterprise requires connectivity along not only roads, rail, and sea, but in telecommunications, financial markets and information-processing. At a country level, having inefficient or inadequate systems of transportation, logistics, and trade-related infrastructure can severely impede a country's ability to compete on a global scale.

Even for goods manufactured and sold locally, high logistics costs for goods and services has serious implications for the country's poor, who often are disproportionately  dis connected from global, regional or even local markets. Poverty is often concentrated in geographic areas that are poorly connected to active economic centres, within and between countries. Businesses and communities in these areas miss opportunities to develop skilled, competitive workforces; they are not integrated in global production chains and are less able to diversify their products and skills.

Making it easier for firms and people to access opportunities, markets, and supply-chains is fundamental in today's trade environment. Connectivity encompasses physical facilities, services, and ways to facilitate the movement of goods and people within and across borders regardless of their relative position within a network, e.g. hub or feeder, central or remote. The connectivity of one economy depends on the connectivity of all its partners. Understanding how well or how limited is connectivity requires information about trade costs and economic distance, which reflect the average cost to access markets as a buyer or supplier. Connectivity links trade with transportation, entrepreneurship, and territorial development.

Why do we need the NLP?

The need for a national logistics policy was felt since the logistics cost in India is high as compared to other developed economies. It is imperative to reduce the logistics cost in India for improving the competitiveness of Indian goods both in domestic as well as export markets. Reduced logistics cost improves efficiency cutting across various sectors of the economy, encouraging value addition and enterprise.

A comprehensive document prepared by policymakers with inputs from the private sector leaders can serve as a guiding point on all aspects of logistics to sub-serve the twin goals of increasing connectivity and facilitating trade. Developing countries such as India and all its neighbouring nations that are landlocked face considerable challenges when it comes to tackling trade facilitation issues. Recognizing this, India has taken big steps by investing heavily in connectivity, logistics and trade facilitation. The PM Gati Shakti Program 2 launched by India's Prime Minister in October 2021 was a giant step in enhancing multi-modal logistics. The logistics infrastructure is one of the seven engines of the said Program and the NLP now is another big leap in that direction.

In the recent years, the Indian Government has put significant emphasis on improving both, Ease of Doing Business and Ease of Living. The National Logistics Policy has been taken up as a comprehensive effort by the Government to address issues of high cost and inefficiency by laying down an overarching interdisciplinary, cross-sectoral and multi-jurisdictional framework for the development of the entire logistics ecosystem.

The NLP also envisages establishing the following by way of an institutional framework

- A National Council for Logistics (chaired by the Prime Minister of India)

- An Apex Inter-ministerial Committee (chaired by the Union Minister of Commerce & Industry)

- An India Logistics Forum (chaired by the Commerce Secretary with representatives from key industries, stakeholders and academicians)

- An empowered task force on logistics (chaired by the Head of the Logistics Wing of the Commerce Ministry)

NLP - Coverage

The NLP in clear terms asserts its intention to reduce the logistics cost from the current 14 -16 percent to about 10 percent or lesser over the next couple of years. It also inter alia aspires to streamline export-import procedures and processes to promote trade competitiveness, reduce dwell time for inter-state cargo movement and ensure seamless cargo movement at Land Customs Stations (LCS) and Integrated Check Points (ICPs).

Following are the four main features of the NLP:

(a) Integration of Digital System (IDS): 

The NLP envisages integration of 30 different digital systems of seven different departments including the road transport, railways, customs, aviation, foreign trade and commerce ministries. This is aimed at improving shorter cargo movement.

(b) Unified Logistics Interface Platform (ULIP): 

Creation of the B2B ecommerce logistics platform, ULIP, is intended to lead to seamless movement of cargo.

(c) Ease of Logistics (ELOG): 

A new policy will be implemented to simplify the rules and ease the logistics business.

(d) System Improvement Group (SIG): 

All logistics-related projects shall be monitored regularly and hurdles faced, if any, shall be tackled on a real time basis.

Some of the other important areas covered by the NLP are:

- Trade infrastructure investments in India, especially along major routes

- Logistics and transport services

- Regional trade facilitation and trade corridors

- Transit and multimodal transport

- Customs and border management

- Port efficiency

It is the last four of the six areas mentioned above that are relevant from a Customs, GST & Income Tax perspective. Let us touch upon these briefly below before we set out to understand the tax aspects:

Trade and Corridor Management t hrough the NLP

A trade and transport corridor is a coordinated bundle of transport and logistics infrastructure and services that facilitates trade and transport flows between major centers of economic activity. The NLP will act as a comprehensive guide to formulate strategies, processes and procedures for establishing or regulating corridor projects, as the volume of such projects is likely to increase in India. Corridors remain very important, especially for India's connectivity to landlocked countries such as Nepal, Bhutan and Afghanistan in South Asia. The NLP can serve as a comprehensive and holistic compilation of approaches and techniques on corridor diagnostics, performance assessment, management, operations improvement, and impact evaluation. It will help identify mechanisms for improving the performance of the corridor through initiatives by the public and private sectors. These initiatives include investments in infrastructure and modification of policies and regulations, especially related to trade facilitation. Some of the measures under the NLP could help define the government's capacity to maintain the infrastructure and regulate the flow of goods along the corridor and the private sector's ability to provide a variety of levels and quality of services, as measured in terms of time and cost.

Emphasis on Logistics competencies, skills, training assessment under the NLP

Logistics in India, as an industry, is currently struggling to hire skilled workers, although the shortages of truck drivers and other personnel are not as acute as seen in developed countries. However, managerial shortages are more widespread here. In developing countries such as India, with a potentially available workforce, lack of vocational preparation for careers in logistics means that less-skilled workers are not easily re-skilled. Logistics tasks at the upper end of the occupational hierarchy and those with high information technology content often require an upskilling of employees to keep pace with new technology. Yet the problem is not confined to recruitment. There is a severe constraint on resources, money, and staff time allocated to training.

Despite the spread of automation and new supply chain management paradigms, logistics remains dependent on a rather specific set of skills and competencies, whether for managerial, administrative, or blue-collar jobs, such as trucking or warehousing. This dependence implies that the logistical performance of businesses, industries, and states or union territories in India is strongly influenced by the quantity and quality of the workforce. Insufficient resources of a competent and properly trained workforce in logistics adversely affect the quality of service, reduce productivity in sectors dependent on logistics, and ultimately reduce trade competitiveness. The contribution of human resources in the development of a nation's logistics sector is at the core of the growth of the sector and the National Policy certainly aims to explore how to develop skills and improve competencies, especially in regions with poor connectivity by road or rail or ports. The NLP proposes a framework for the skills needed according to the logistics activity (such as transportation or warehousing) or the type and level of responsibility.

Through a combination of facilitation, regulation, advice, financial instruments, and land use planning proposed under the NLP, the Government intends to exert significant influence on the rapid development of the sector.

Modernising Cross Border Trade Logistics

The Infrastructure Connectivity Vertical of Niti Aayog (an overarching constitutional body overseeing policy formulation and implementation of various core and non-core sectors of Indian economy) strives to create a transport system that is common, connected, convenient, congestion-free, clean, and cutting-edge. This Vertical facilitates policy formulation and evaluation with the aim of sustained and holistic development of the transport and logistics sectors.

A close look at t he NLP reveals that concerned Government agencies under the Commerce Ministry will seek the help of other institutions such as the Central Board of Indirect Taxes & Customs (CBIC) and the said vertical of the NITI Aayog, in order to continuously redefine the principles for improving trade facilitation through better border management, including practical advice on particular issues. In contrast to the traditional border management reform agenda, with its focus on improving customs operations, the emphasis under the NLP would be on both, customs reforms and areas well beyond customs - a significant broadening of scope. The NLP thus presents a new, more comprehensive approach to trade facilitation through border management reform: an approach that embraces a much wider, 'whole of government' perspective.

The NLP also refers to the National Trade Facilitation Action Plan (NTFAP) in order to summarize and provide guidance on what constitutes good practices in border management - looking beyond customs clearance. It provides a range of general guidelines that can be used to better understand the complex border management environment and the interdependencies and interrelationships that collectively need to be addressed to secure meaningful change and improvement.

World Bank's LPI Report, a key driver for the NLP

World Bank experts have developed a range of reports and toolkits for practitioners and policymakers to support improvements in countries' global trade connectivity, logistics performance, as well as customs and border management.

The Logistics Performance Index (LPI) of the World Bank measures how well countries connect to international logistics networks. It helps countries identify ways to improve their trade logistics performance. Based on a worldwide survey of operators on the ground-such as global freight forwarders and express carriers-the LPI provides in-depth knowledge and feedback on the logistics "friendliness" of the countries in which the operators do business and those with which they trade. It provides an informed qualitative assessment of the global logistics environment for the benefit of government and trade practitioners alike. The LPI ranking is an agglomeration of rankings on six parameters, namely - Customs, Logistics Infrastructure, Facilitation of International Shipments, Logistics Competence, Tracking & Tracing and Timeliness. Under the NLP, India aims to improve its ranking to move up between 30 - 25 from the current ranking ranging in the high 30s.

WTO's Customs TFA and WB's Ease of Doing Business Rankings could be contributing factors for the NLP

India ratified the WTO sponsored Customs Trade Facilitation Agreement (TFA) in April 2016. This agreement requires signatory nations to further improve their customs clearance and logistics eco-system. Towards this goal, specific commitments have been identified under Category A (priority implementation) and Category B (gradual implementation). India achieved 100 percent implementation under both categories by October 2021. Also, India continuously improved its Ease of Doing Business rankings assigned to countries by the World Bank over the 5 year period until 2020 to leapfrog from 130 to 63. Logistics is one of the key parameters on which these rankings were based.

Signifying its intent to further improve its trade logistics ecosystem, the Government, under the aegis of the CBIC formulated the NTFAP (2017-20). It was an early measure by the Government of India, after ratification of the TFA, to be an active facilitator of trade. The NTFAP was envisioned to be a live document which contained 96 specific measures assigned to stakeholders with indicative timelines for implementation. It contained two distinct set of measures. The first set of measures were required to ensure compliance with India's Category B commitments and also sought to improve certain elements of Category A commitments. The second set of measures (identified as TFA Plus) related to infrastructure and technology adoption, prime enablers of India's overarching trade facilitation strategy.

Collectively these measures sought to enable a reduction in the overall release time associated with the clearance of goods with regards to:

Imports - less than 48 hours for Sea / ICD / ICP and less than 24 hours for Air.

Exports - less than 24 hours for Sea / ICD / ICP and less than 12 hours for Air.

To operationalize the NTFAP, a three-tiered institutional mechanism was formulated to monitor progress and guide appropriate course correction when needed.

The NTFAP (2020-23) has replaced the preceding NTFAP. Under the current action plan, the CBIC envisaged implementation of the balance 22 percent of commitments under Category B as 72 percent of commitments had been already implemented under Category A and 6 percent under Category B by February 2021 itself. The new NLP is also a testament of this intent to further ease trade facilitation bottlenecks.

What tax incentives can the logistics sector expect from the Government?

GST

After the announcement of the NLP, it is expected that the GST Council, in its forthcoming meetings, could consider offering some concessions on GST rates or procedures to logistics services providers. A few of these could be on the following lines:

1. Restoration of exemption (withdrawn w.e.f July 18, 2022) to transportation of goods by rail or vessel;

2. Partial or full exemption to services by way of construction of infrastructure for Multi-modal Logistics Park;

3. Input Tax Credit (ITC) facility on motor vehicles used in the business of providing any logistics service;

4. Exemption to services of leasing of assets by any Financial Institutions for operations of an unit in a Multi-modal Logistics Park;

5. Training Services for the logistics sector approved by the National Skill Development Corporation or any other Institution notified by the Government

Income Tax

Income Tax incentives would be the most anticipated ones by businesses in the logistics sector, given the sheer scale of investments that the sector demands for giving impetus to creation of Multi-modal Logistics Parks (MMLPs), a National Logistics e-market place, a Logistics Data & Analytics Center, Startup Acceleration Fund. The NLP also talks about incentivising Logistics Skilling Programmes.

Under the Income Tax Act, incentives on following lines may be expected to be announced in the coming union budget or even earlier -

1. Additional depreciation on new plant & machinery in the range of 30 - 40 percent in respect of storage & warehousing, loading & unloading and such other activities by a logistics service provider;

2. Investment allowance of at least 10 percent of actual cost of new asset acquired and installed by a company engaged in specified logistics operations;

3. Deduction to the extent of 100 percent of contribution made to approved startup acceleration fund or any notified institution established for achieving excellence in logistics could be allowed as deduction (subject to certain conditions)

4. 100 percent of contribution made to approved skill development centres or other institution with objects of undertaking skill development of training of personnel in the logistics sector could be allowed as deduction (subject to certain conditions)

5. Capital expenditure incurred, wholly and exclusively, for the purpose of setting up and operating a multi modal logistics park (subject to such deduction being available only to an Indian company)

6. 100 percent of expenditure could be allowed as deduction on notified skill development projects in the logistics sector (subject to certain conditions)

7. Exemption of capital gains on transfer of assets in cases of shifting of a business undertaking engaged in providing notified logistics services from any urban area to any notified Multi-modal Logistics Park or any notified non-urban area (subject to certain conditions and limits)

8. Profits and gains derived by an undertaking/enterprise from business of developing a Multi-modal Logistics Park notified on or after January 1, 2023 (subject to certain conditions and limits)

9. Profits and gains from business of providing notified logistics services in specified areas (subject to certain conditions).

Summing Up

The National Logistics Policy has just been launched and it is early days yet to really predict whether by itself it would help in the expansion of the logistics sector to the extent it aspires to. However, one thing is sure, there is an express recognition of the contribution of the logistics services in managing the cost of goods sold in the country as well as exported globally. Hence, it is imperative that both, the Government Institutions and the Private Sector tries to make full use of the policy recommendations and enhance India's trade competitiveness way beyond its current levels.

(The views expressed are strictly personal.)

1 PM launches National Logistics Policy accessed at https://www.pmindia.gov.in/en/news_updates/pm-launches-national-logistics-policy/

2 P M GatiShakti National Master Plan (PMGS-NMP) was launched on October 13, 2021 for providing multimodal connectivity infrastructure to various economic zones.

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