Logistics companies all over the country 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. Under the existing CST regime, manufacturing companies had small warehouses and depots in every state. This was done to reduce the CST burden, which they would have incurred if they carted goods from a neighbouring state.

With the phasing out of CST, they can avoid that and outsource the job to logistics service providers who can build large warehouses in few key locations and reap economies of scale. Says Prashant Mishra, manager-marketing communication, Safexpress, "This is a welcome move as the overall share of the pie of the express distribution will surely increase.

Moreover, it will also ascertain more avenues for the logistics industry as companies shall start planning their supply chain based on demand rather than worrying about tax savings."

What essentially used to take place under the CST regime was that in their bid to save taxes, companies would often set up multiple stocking points which would result in higher costs of inventory, manpower, infrastructure and other overheads.

But with the gradual 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 in the region, which in turn will lead to greater outsourcing of the job to logistics service providers.

Mr Mishra also believes that phasing out of CST will also pave the way for value-added taxation (VAT) becoming a central level tax which in turn can guarantee a much smoother logistics and distribution.

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.

What's surprising is that, sometimes manufacturers have resorted to some extreme steps in their bid to reduce taxes. Says Vineet Agarwal, executive director, Transport Corporation of India (TCI), "Higher CST forced some dealers to move goods without valid documents.

In competitive transportation market many transporters were forced to carry such goods. This also resulted in greater checking at check-posts and more vehicles standing idle with goods at such check-posts affecting productivity of resources."