Retail sector in India:
The Indian retail industry is one of the fastest growing industry in the world. Retail industry in India is expected to grow to US$ 1.3 trillion by 2020, registering a Compound Annual Growth Rate (CAGR) of 16.7 per cent over 2015-2020.
India is the fifth largest preferred retail destination globally. The country is among the highest in the world in terms of per capita retail store availability. India’s retail sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier-II and Tier-III cities.
The Government of India has introduced reforms to attract Foreign Direct Investment (FDI) in retail industry. The government has approved 51 per cent FDI in multi-brand retail and increased FDI limit to 100 per cent (from 51 per cent) in single brand retail.
Overview of GST:
GST stands for goods and services tax which is a consolidation of almost all the existing indirect taxes levied by centre and state respectively. Under today’s world of globalization where every country is getting closer to each other we cannot afford to have state barriers like entry tax, octroi and road permits etc.
The ultimate aim of GST is to eliminate all such barriers within a country on free flow of goods and services along with seamless availability of input tax credit. In India we have dual GST model where on all intrastate supply of goods and services CGST and SGST shall be charged whereas on interstate supply IGST is attracted.
At this point of time it becomes important to understand that the concept of manufacturer, sale, and provision of services will go away and we will have a new taxable event called supply. GST will be attracted on supply of all goods and services except alcholic liquor for human consumption whether for a consideration or even without consideration in some cases.
Impact on taxation part:
Under the existing regime of indirect taxes the burden of indirect taxes on 65%-70% of items is around 30% and sometimes it goes beyond that also. This figure of 30% includes excise 12.50% on 80% of the items, VAT 14.50% on 55% of items, entry tax, octroi etc. When we are paying indirect taxes to the tune of 30% or so under GST it will come down definitely. At this point of time I am not in a position to comment upon the rate of tax going to be applicable but the RNR report given by Govt. suggests below mentioned rates.
Revenue neutral rates as per CEA Mr. Arvind Subramanian:
|S.No.||Class of goods||Commodities covered||Rate of tax|
|1.||Basic need items||Milk, wheat, fruits etc.||Nil*|
|2.||Precious metals||Gold, diamond, silver etc.||2%-6%|
|3.||Lower rate goods||Steel, cement, iron etc.||12%|
|4.||Standard goods||Garments, watches etc||18%|
|5.||Luxury goods||SUV cars, tobacco, aerated drinks etc.||40%|
* As replied by union FM in Rajya sabha while answering question of members on 122nd constitutional amendment bill on 03-08-2016. The rates includes both CGST and SGST.
So looking at the above table and burden of existing indirect taxes (30%) what you think about incidence of tax under GST? In my mind under GST there will be no tax on tax which is causing distortion and artificial inflation on the prices of goods. Overall in my opinion the burden of tax will reduce significantly as compared with existing system where there is tax on tax.
Availability of input tax credit:
This is again one of the big advantages for the retail sector where certain taxes charged on supply of services say on rent payment for outlets, huge professional charges paid for various services like recruitment agency etc. will now available as credit under GST. The duty payment made at the time of import (CVD+SAD) of goods will be available as tax credit under GST which was earlier a cost for the sector although refund of SAD was available subject to various restrictions and various checks and balances. In my view this enhanced availability of credits brings a very positive impact for the sector.
Phasing out of CST will brings efficiency in supply chain:
In the present system of taxation every company in the retail sector plans locations of its warehouses and branches in order to avoid cost of CST. Suppose if a retailer is located in Delhi and it procures material from a manufacturer in Maharashtra then normally they prefer the route of stock transfer against f form to avoid CST although loss of retention is borne overall. Once GST is implemented all interstate supply of goods shall be subject to IGST which is a creditable tax. This availability of credit will give options to the sector to shut some of the locations which were just used to transfer goods from depot to outlets. Under proposed GST regime transfer of goods will be more simple with availability of tax credit completely.
Place of supply in case of retail sector:
GST is a destination based consumption tax where tax goes to the state where goods or services are actually consumed. Therefore it becomes important to determine the correct place of supply for making payment of tax. On careful reading of model GST law it is clearly written that POS in case of retail sector (B2C) shall be the location of goods at the time of delivery to the recipient i.e. location of store. This whole analysis reveals that in case of B2C transaction in retail sector CGST+SGST shall be charged.
This principal is not diluted even in case home delivery is made by a retailer in his local limits. The POS in this case will be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient i.e. again intrastate.
Overall we can say that under proposed GST regime place of supply for retail sector shall be the location where goods are delivered to the customer.
Compliance related requirement under GST:
The entire compliance system under GST will be taken care by GSTN (Goods and services tax network) which is a IT network for managing all the process related to registration, returns, payment etc. This network is one of the largest in our history which will be processing 3 billion vouchers per month with 50000 transactions per second.
As per the process note on GST returns invoice level information will not be required to be given for a company where supplies are made to customers i.e. B2C supplies but HSN codes will be mandatory for invoice purposes. For taxable persons up to the turnover of 1.50 cr. HSN codes are not required but in case turnover exceeds 1.50 cr. but up to 5 cr. HSN codes of 2 digits and turnover above 5 cr. HSN codes of 4 digits will be mentioned in invoices.
Drastic change in agreements with supplier:
Under the GST regime concept of mismatch is envisaged where details of inward supply shall be matched with outward supplies reported by the suppler. On careful reading of model GST law particularly section 16(11) (C) which says tax credit shall be available to the recipient only if the tax has been paid by supplier in cash or utilization of admissible tax credit. This whole provision put onus on buyer to make sure that his supplier has paid tax which was charged from him. Tomorrow when GST will be implemented we will have such situations where we might have to reverse ITC availed on provisional basis although tax has been paid to supplier.
Do you have an enabling clause for recovery of such demand paid by you in your agreements with supplier?
I think big NO, this is the point we would like to focus on please revisit your agreements so that in case such circumstances arises effective legal action can be initiated against suppliers.
Transitional challenges for retail sector:
The model GST law contains a detailed chapter on transitional provisions wherein many transitional possibilities have been covered as per the wisdom of lawmakers. Migration of registration from existing law to new law, carry forward of tax credits shown in returns, refunds pending in previous law etc. As per our understanding following critical issues have not been addressed while drafting transitional provisions:
- If supplier has removed goods on 30th day of March 2017 or 31st March which is received by customer on say 01st day of April 2016 or later on. What will be the status of tax credit in this specific case ? This has not been discussed anywhere in model GST law. This is a matter of representation for industry and needs serious consideration at the time of finalization of law.
- On careful reading of provisions given in model law credits which are part of return shall be taken into GST regime. The portion of excise duty which is embedded in closing stock of retailer at their outlets, depots will suffer higher tax again when these goods will be sold into GST regime. Serious representations should be made in this regard by industry to ministry otherwise such a big tax reform will lead to a situation of stock out on closing dates which cannot be the intention of Govt.
Gifts, free samples also taxable under GST:
The concepts of manufacturing, sales are no more relevant under GST regime because we are moving to a more comprehensive taxable event which is supply as defined under section 3 of model GST law. If we touch upon the definition of supply it says supply includes all forms of supply made or agreed to made for consideration in the course or furtherance of business and also includes certain transaction as supply even without consideration as per schedule I.
Now clause 5 of schedule I says supply of goods and / or services by a taxable person to another taxable or non taxable person in the course or furtherance of business even without consideration is taxable under GST.
So under GST regime if you are giving a gift to one of your customer you will be liable to pay GST on it which is not there under current VAT laws. These kinds of transactions of gifts, buy one get one free are very common under retail sector and will impact business or sales promotion policies significantly.
Valuation challenges for retail sector under GST:
The value of supply of a goods and services under GST shall be transaction value provided the supplier and recipient are not related parties and price is the sole consideration for supply. So in case of gifts, free samples, buy one get one free value shall be determined by following valuation rules given separately.
The value on which is tax is paid by following valuation rules may also be rejected by assessing authority if they have reason to doubt the truth or accuracy of value.
Blockage of working capital in case of stock transfer:
Gone are the days when stock was transferred between the offices of same entity on strength of F forms under CST law. This was a great planning tool for many companies to avoid CST cost in case goods are procured from other states. Now under the GST regime interstate movement of goods will attract IGST and even in case of same entity also hence it will cause significant blockage of working capital.
The branch which is transferring goods to another branch of same entity has to upfront pay the tax but the receiver can book the credit and use this tax to pay his output GST liability in times to come.
Critical issues in trade incentive and discounts:
Trade incentives and discounts that are allowed after the supply of goods have been effected shall become part of transaction value on which tax is paid by the supplier of goods. The incentives such as yearend sale discount, festival sales, turnover discount etc. are normally given after supply and cannot be linked to specific invoices will now become part of transaction value and tax has to be paid. This is a serious matter of representation for the retail industry before the law gets its final shape.
Tax rates will play critical role for industry:
A lot of discussion is going on today about rate of tax under GST regime. If go through the revenue neutral report (RNR) as discussed above there will be 5 categories of rate for goods under GST. Have you visualized the impact of GST rates on certain commodities where total incidence of indirect tax is 6%-8% presently and this includes excise duty and VAT/CST? Here I am talking about few commodities such as edible oil, papad industry where rates will shoot-up even if it is kept in lower slab of 12%. In my view if the rates are not kept at existing level industry will be adversely impacted.
Whether prices of commodities will really come down after GST?
In this part of my article a comparison is made for understanding the impact of GST on prices of goods which are presently taxable @ 27% under existing excise and VAT.
|S. No.||Transaction detail||Pre GST regime||Post GST regime|
|1.||Cost of raw material||10.00||10.00|
|2.||Inputs used for making final product||5.00||5.00|
|3.||Profit margin of manufacturer say 10%||1.50||1.50|
|4.||Excise duty paid by manf. @ 12.50% on (1+2+3) OR |
GST @ 18% on (1+2+3)
|5.||State VAT paid @ 14% on (1+2+3+4)||2.60||0.00|
|6.||Retailers margin say 18%||3.37 |
(18% of 1+2+3+4)
(18% of 1+2+3)
|7.||State VAT collected @ 14% OR |
GST @ say 18%
(14% * 1+2+3+4+6)
(18% of 1+2+3+6)
|8.||Final price to consumer||25.00||23.00|
The table clearly depicts that the prices of 65%-70% of products will come down if the rate of tax on standard goods is fixed at 17%-18% as suggested by chief economic adviser. This calculation is done without taking the efficiency in supply chain due to reduction of cost of transport and the burden of entry tax, Octroi etc. We are optimistic that on price front GST will give boost to retail industry because in a reasonable period of time prices of goods may come down by 10%-12%.
Matters of serious consideration for retail sector:
This part of my article will discuss some of the serious issues in model GST law which needs immediate attention of authorities in a summary manner:
- Gift and promotional offers: Looking at the international practices in Europe and other countries gift, free samples should not be included in the definition of supply to avoid business promotion strategy of taxable persons. If this is not possible exemption must be granted up to a certain limit say 20000 or so and this is internationally followed in some of the countries.
- Credit of CST and excise on closing stock: Stock lying on the date of transition will contain portion of excise duty which is a cost for the entire retail sector. When the same stock will be sold in GST regime the output tax will be higher which will become cost for the industry. If amicable solution is not given it may lead to a stock out situation which is not expected from such a big reform. Industry must make an attempt to convince Govt. to allow at least a deemed credit on account of excise and CST.
- Incentives and discount post supply: As envisaged under GST discount will become part of transaction value unless it is linked with the relevant invoices. In case of yearend target discounts it cannot be linked with the invoices hence this provision should be relooked and a suitable solution must be provided for the same.
- Free flow of goods across the nation: GST is designed with the theme of free flow of goods across the nation without any kind of barriers such as check post etc. to check the documents accompanied with goods vehicle. If we go through the model GST law certain documents may be prescribed by Govt. if value of consignment exceeds Rs. 50000. Such kinds of provisions should not be there in GST to avoid corruption and other consequences.
- Matching of inward and outward supply: On the basis of process note released by Govt. on GST return a matching will be carried out by GSTN on the next day of filing GST return in form GSTR-3. In case of retail industry especially FMCG sector the number of suppliers will be many more and tracking of mismatch on pan India basis will become herculean task. In our opinion such kinds of draconian provisions should not become part of law in times to come.
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Disclaimer: Views expressed are strictly personal. The content of this document are solely for informational purpose. It doesn’t constitute professional advice or recommendation. The Author does not accept any liabilities for any loss or damage of any kind arising out of information in this article and for any actions taken in reliance thereon.