Logistics companies are raising a toast to the first step taken by the government towards the gradual phase out of the central sales tax (CST) regime. The CST phase out is expected to be a key logistics demand driver. Applicable from April 2007, CST will be reduced to 3% from the existing 4% rate.

According to Prashant Mishra, manager-marketing communication, Safexpress, “This is a welcome move as the share of the express distribution pie will increase. It will also open up new avenues for the logistics industry as companies will start planning their supply chain based on demand rather than worrying about tax savings.”

Under the existing CST regime, manufacturing companies would set up multiple stocking points, resulting higher costs of inventory, manpower, infrastructure and other overheads. With the phasing out of CST, manufacturers will be able to operate on a hub-and-spoke model. Thus, they can have large regional warehouses that can be used to supply cargo to different states, which in turn will lead to greater outsourcing of the job to logistics service providers.

Mr Mishra believes that phasing out of CST will also pave the way for value added taxation (VAT) becoming a central level tax, which in turn will guarantee a much smoother logistics and distribution movement. The CST is expected to be phased out over a period of three years — from 4% to 3% in 2007-08, 2% in 2008-09 and 1% in 2009-10. The tax will be phased out completely in 2010-11.

“Earlier, in a bid to reduce taxes, some dealers would move goods without valid documents. In a competitive transportation market, many transporters were forced to carry such goods. This resulted in greater checking at check-posts and vehicles getting stranded with goods,” said Vineet Agarwal, executive director, Transport Corporation of India (TCI).