Touted as one of the most comprehensive tax reforms the country has ever seen, the GST bill has been on the radar of every economist and individual, who is likely to be impacted by it.
The bill is expected to transform the country into a unified market, replacing most indirect taxes and merging all those into a single tax regime. However, amid all the ‘yays and nays’ around the GST bill, while the big retail chains are certain to gain immensely from it, we are mildly apprehensive about the smaller neighbourhood retailers. But, we will come to that in a while.
With the all-inclusive tax levied on manufacturing, sale and consumption of goods and services at the national level, the bill eliminates additional taxes on transportation of goods across state boundaries. Besides, a mechanism has also been designed to settle existing disputes among states, along with a programme to compensate states for their revenue losses in the first five years of the implementation of GST.
The enactment of the bill will also lead to a seamless integration of goods and services transaction across states and will positively impact various components in the retail value chain at different stages.
Procurement of raw material will be less cumbersome and tedious and it could also make space for newer suppliers and vendors to cater to the growing market. Ensuing that, a wider base of distributors would emerge, as the complexities associated with state-boundary paperwork will be eradicated, allowing better access and low transportation costs.
Additionally, with reducing working capital requirements, the supply chain will reduce in transit inventory. In a nutshell, a simplified taxation system and availability of input tax credits also aids in fetching better margins.
While these are some of the projected implications of GST, we believe that reality is a little more complex than it seems. While the larger players in retail and manufacturing will benefit significantly from this implementation, we would like to shed some light on certain softer yet complex matters.
The neighbourhood retailer
There is no doubt that the GST bill is a great system that regularises the flow of information and simplifies taxation. However, if we dig deeper, in the whole scheme of things, the bill has not fully considered the small neighbourhood retailers catering to those small unexploited ghettos in every town and city in India.
For instance, the existing VAT system has some stringent regulations, wherein, a discrepancy of even two rupees in tax filing could warrant a fine of INR 10,000 from the department. Given these complexities of tax filing, most small retailers, with their moderate educational background, are most likely to struggle, managing such affairs. Therefore, we believe, measures should be taken to educate these retailers on GST, along with simplicity of process. Else, there is every possibility of these small retailers collapsing.
Adding more insights to our apprehensions about GST; in the current system, taxes are levied both by the Centre and states, and are hidden. As a customer, one is only exposed to VAT. Now suddenly when customers will see their taxes being hiked up to 18% instead of 5% VAT, they are more likely to pressurise or request the neighborhood retailer to sell products without any bill. However, if the retailers are unable to take input credit on the goods bought, they will end up forfeiting all their GST benefits completely.
Sample this: retailers typically work with a 10% margin on branded products – that is, for a product with a maximum retail price of Rs 100, a retailer makes Rs 9. The rest, Rs 91, is his buying price. If one applies input credit of GST at 18%, it translates into Rs 91 plus Rs 16.38. Unless the retailer makes all invoices properly, he will lose out on the Rs 16.38 per product, which is, in fact, more than his margin. Therefore, educating smaller players in the retail segment will ensure a full-fledged success of the bill.
Moving on, while the implementation of GST is saving costs at the back-end, it is also countering a major pain point in the retail segment – rentals. Retail, for ages, has been burdened by high rental costs, which incurs a service tax of 15% on rent payable. Unlike other industries, the retailers cannot set off these costs and view it as an additional expense that inconsiderately exists only in the retail sector. However, now under GST, taxes on services would be available to be set-off against taxes on goods, thereby positively impacting the retailers.
Over and above that, other costs weighing the retailers down are countervailing duty (CVD) paid on import of goods, excise duty paid on goods manufactured in India, central state tax paid on inter-state procurement of goods and service tax paid on input services.
However, the GST charges on the aforementioned trades would be commendable. It completely eradicates the domino’s effect of taxes and could lead to reduction in effective tax cost for various products.
GST vs VAT, others
We would also like to chart out what makes GST better than VAT. To begin with, VAT is state-specific with a limit of Rs 10 lakh in turnovers, whereas, GST unifies the market with a registration limit of Rs 20 lakh. Moreover, VAT has TIN-based registration, while GST registration is PAN-based.
Likewise, while GST comes with a seamless flow of input tax credit, CST on inter-state transactions comes with no input tax credit. Adding to its complexities, VAT requires declaration forms like C, H, etc., while GST needs no declaration forms.
Similarly, in VAT one can claim for returns within 45-60 days from the end of a quarter, while in GST, the returns start coming in from the 20th of the succeeding month in a phased manner.
Furthermore, VAT has no specific mode of payment, while in GST if payment exceeds Rs 10, 000, one needs to make it through the electronic mode. Last but not the least, VAT has no rating system for a business, whereas, GST rating is based on timely filing of returns and payments.
Hence, on a concluding note we would like to say that, just the way we are certain about the benefits of GST in the retail segment, we are confident that it will bring relief to the consumers as well by eliminating a plethora of taxes such as CST, Octroi and excise, among others.
The author is co-founder and director of e-commerce aggregator Beacon.
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