Retail Industry

GST : A game changer for retail industry

Retail Industry has emerged as a backbone of Indian economy in the past few years, accounting to approximately 10% of our GDP. In a global perspective, it ranks among the top five retail markets operating across the globe. When we discuss it in terms of its economic value, it is estimated to be more than US $598 billion.

With the forthcoming implementation of GST, it is expected that it will bring in much needed transparency to the tax regime reducing the barriers to trade, thereby improving the flow of credit. The government’s keenness and commitment to implement GST law in 2017 can be witnessed with the timely release of GST rules and documentation templates and draft of GST model law.

Renowned economists across the country have agreed that GST will steer in a series of changes about the operational aspects of business entities. Retail industry will not be an exception to the innumerable changes happening around them because of the implementation of new tax structure.

This insight will highlight some of the prominent areas that will be impacted and the enormity of changes that the industry would need to imbibe over the period of next few months to ensure effective implementation of GST.

GST in Hindsight

GST is a tax on value addition that is levied at each stage of supply of goods and services. The primary reason behind GST collection process in a staged manner is that the government wants to ensure that a business owner doesn’t have to endure to burden of different taxes and enable the flow of taxes through the hands of the final consumer.

Charter of GST

  • A uniform and standalone taxable event of ‘supply’ would come in as a replacement of multiple tax structures such as sales tax, VAT, excise duty etc. prevalent under the current tax structure.
  • Every supply of goods and services pertaining to intra-state transaction would fall under the bracket of State GST (SGST) and Central GST (CGST) simultaneously.
  • Transactions pertaining to imports and stock transfers across multiple states will be liable under Integrated GST (IGST)
  • Taxes will be levied as per the destination-based consumption principles as they would accrue to the prerogative of the place where goods and services are finally consumed.
  • The brunt of cascading taxes will be reduced considerably as the flow of credit will move across entire supply chain across all states in the economy.

Key perspectives from a strategic decision-making standpoint

As the industry makes a shift towards a unified tax regime, there is an inherent need to re-examine the major strategic decisions that will be affected by the implementation of GST.

Sourcing of goods

GST will eradicate all tax barriers concerning procurement of goods on inter-state basis. In a similar manner, a robust tax mechanism will also lead to a reduction in non-recoverable import duties that are levied on procurement of goods beyond Indian shores. This will give much needed opportunity to retailers to introspect on the current sourcing pattern of goods. This will enable them to derive maximum benefit from economies of scale and tax neutrality as they would centralize procurement processes from best vendors, despite them being far in terms of geographical proximity.

Impact on retail margins

It is estimated that that four-tier GST tax slab will vary tax burden when we compare it to the taxes levied under current structure. Retailers across the country are expected to witness an upsurge in payment of input tax credit on the levy of taxes such as CST, octroy, excise duty, service tax, which were non-recoverable in the previous scenario will be incorporated in GST and the whole payment that is made will be rendered as input credit for adjustment against liability of sales of goods under GST.

Fundamental areas to ponder from a transitional standpoint

The transitional standpoint brings in the continuity of benefit secured while moving from the current regime to the GST regime.

Credit of taxes paid on procurement of goods lying in stock on date of transition to GST

Implementation of GST will make the retailers eligible to claim credit of non-recoverable taxes in the previous tax structure for indirect taxes such as service tax, excise duty subject to the following conditions:

  • The retailers would look pass on the benefit derived from such credit by the way of slashed prices to customers.
  • Goods lying in stock before the date would play a key role in making taxable supplies under the new and unified tax structure.

In the current scenario, retailers do not account for non-recoverable taxes in separate books of accounts. Apart from this, vendors that are not registered under excise law is not an indicator of the taxes levied on the invoices issued for procurement of goods. Thus, retailers would be required to put a system in place wherein it is ensured that they are disclosing at the taxes.

Migration of existing registration to the new one

In the current tax regime, retailers are registered with state-specific VAT with engagement of service tax authorities in provision of services. With the implementation of GST, retailers would be required to comply with procedural requirements of the state and automatically migrate to obtaining provisional GST registration. The documents need to submit within six months for obtaining final registration in GST.

Key areas to focus on from supply standpoint

The implementation of GST will lead to an improvement in the competitiveness of the retail industry. Retail industry would be boosted by the elimination of multiplicity of taxes and simplified tax structure will take over with its implementation.

Varied GST rates for consumer goods

The GST council has agreed to implement a four-tier tax structure as follows:

  • Luxury goods-28%
  • Above standard goods-18%
  • Standard goods-12%
  • Mass consumption items-5%
  • Essential items- No tax

There will be a number of goods in different categories that will fall under different tax brackets under the new tax structure.

Post supply discounts

Retail industry has a vast number of competing brands across all segments. The pricing decisions are often affected by the levels of competition in the market. The prices are often marked down by suppliers during the offer season. Suppliers also offer post supply cash discounts on high-volume purchases by retailers. In the present scenario, retailers are often met with challenges of state-specific provisions for discounts. Sometimes, retailers prefer not to claim deduction on account of such discounts.

Way ahead

The process of implementation of GST would be critical but would lead to a smooth and easy road ahead. Retail industry would be required to make rapid strides for a robust implementation of GST which would include repricing of products/services based expectations from the market, designing a potent supply chain and a cost-efficient method for procurement of goods.

Retail industry stands to gain a lot once it comes under the ambit of GST compliance. But, some doubts still loom large on applicability of tax for different categories of goods. This ambiguity related to rate of application is accounting for lukewarm response across the industry.

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