Multiple warehouses, inefficient distribution Besides these tax implications, complex state-wise tax structures have serious repercussions

on the manufacturers. Inventory and distribution decisions are based on tax avoidance rather than operational efficiency. Accordingly, most manufacturers maintain warehouses in different states to evidence movement of goods from one warehouse to another to save on the CST. Also, quite a few entities set up warehouses in locations like Pondicherry or Daman, often impractical from a distribution point of view, as the CST rate at such locations were previously lower than the rates prevalent in other states.
Typically, most large consumer durables or FMCG companies in India operate with 25 to 50 warehouses all over India, which is a very high number compared to developed economies (less than 5-8) or even developing countries (less than 10-15) with similar geographical expanse. This has severe implications on cost structure and operational efficiency levels, which is ultimately borne by the end consumer either in terms of costquality trade-offs.

Logistics industry looks to be upbeat the implementation of GST as this regime has some tangible benefits instore for the industry. Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high taxation structure has the tendency to render products uncompetitive in the international market or eats up large portions of the cost arbitrage available in manufacturing set-ups in low cost economies such as India. For instance, the manufacturing cost of most products in India is nearly half than in the west. But, the incidence of multistage taxation i.e. customs duty on imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by the State or local municipal corporations and related costs such as loss of tax credit, compliance and litigation cost chip away this advantage to the extent of almost 50 per cent.

More sum total space & inventory requirement: It is estimated that if tax avoidance is not a factor for deciding distribution network, the total warehouse space can be reduced by 20-50 per cent immediately Small & inefficient warehouses: Given the large spread of 4,000-10,000 sq ft warehouses, the average size of a warehouse has remained small causing duplication of overheads and making it unviable for owners and operators to introduce racking or automation. According to a broad estimate, scale economies start to positively affect warehouses only when they are larger than 30,000 sq ft. Distribution cost and inefficiencies: There are significant cost and inefficiency implications of running a distribution network over a spread of 25-50 warehouses in terms of smaller loads, smaller trucks, state boundaries being the determinant of transportation routes. Other Costs: High cost ERP linkages throughout the warehousing network to ensure realtime visibility of inventory result in higher IT costs. Further, multiple handling across the various layers of distribution and multi-layered compliance requirements result in higher material handling and compliance costs.