GST from 1 July: Retailers in no hurry to stock up fresh inventory, say new tax regime unclear
There are hiccups in the government’s tax reform which is touted as the last step towards simplifying indirect tax regime
Retailers, especially small retailers, are still grappling with the goods and services tax which will come into effect from 1 July. With a few days left for GST to come into effect, retailers are still in the dark about the details and are refraining from restocking. However, it is unlikely to hit consumers yet.
GST, the most-talked-about tax reform of the NDA government that seeks to make India one market, subsumes a host of central and state taxes like excise duty, service tax and VAT, in the first year. However, media reports have said that many of the businesses are yet not ready for the rollout as the systems are not in place yet.
Retailers are worried about not getting credit for their existing inventories once GST comes into force on 1 July. “There is no clarity on how GST will impact retailers,” says Arvind Singhal, chairman and managing director, Technopak. This has forced many to not stock up.
“The reason is that most brands tend to corner the investment the retailers put into their inventory,” says Mayank Premi, co-founder, Beacon Analytics - a tech-enabled demand sensing and aggregation platform that connects brands with retailers, especially small retail outlets and mom-and-pop stores.
For instance, a player in the toothpaste category would want the retailers to invest in his brand. He would give incentives to ensure that he is the most stocked brand with the retailer. But the small retailer is worried about his margins and is now not refreshing his stocks.
The GST has a four-slab rate structure at 5, 12, 18 and 28 percent. The multiple rates bring complexity in interpretation and classification leading to tax disputes, Bipin Sapra, Tax Partner, EY India had told Firstpost earlier.
Most retailers are still confused about the bracket that a commodity will be taxed under. “Presently, if a product costs Rs 100, then it is clear VAT is 15 percent. But under GST, the retailer is not clear about the slab the product will come under,” said Premi.
Many retailers buy goods directly from the wholesalers while some do it indirectly. What they would like to know is whether they can take CENVAT -- this is in respect of central excise on inputs purchased for the manufacture or duty paid in relation to the manufacture of the final product. Is there a solution for it under GST? How will they be able to take benefit of CENVAT or excise duty, asks Gautam Kapoor, co-founder of KartRocket and Kraftly.
Small retailers especially are worried about the international HS Code, developed by the World Customs Organisation. It refers to Harmonised Commodity Description and Coding System. HS Code has around 5,000 commodity groups with every single of them identified by a six digit code. Over 200 countries and economies use it as a basis for their Customs tariffs and for the collection of international trade statistics.
Under GST, HS code has several chapters and most small retailers do not yet know under which category they will be taxed and hence are very uncomfortable about it, says Kapoor.
The Confederation of All India Traders (CAIT) has also requested the government to suspend implementation of e-way Bill and HSN Code for six months. The traders body wants the government to sit with traders to iron out initial difficulties in compliance, a PTI report said.
CAIT has asked the government to clarify which products will come under the ambit of unbranded goods, saying that a lot of confusion has erupted over it among traders.
Asserting that almost 19 percent of the items have been classified in the 28 percent tax slab under GST which was meant for 'luxurious and demerit' goods, Khandelwal requested the government to 'revisit' the 28 percent slab in line with the fundamentals decided by the GST Council.
According to CAIT, stocks pertaining to the period up to the previous one year from date of GST implementation shall only be considered for availing input credit. Full input credit of Value Added Tax is allowed on such stock.
Given the confusion, retailers' worry about incurring losses is understandable. They are selling items at deep discounts in a bid to clear inventories before the new regime kicks in. "Online as well as offline retailers are running major sales, while apparel is one of the biggest categories here," says Rashi Menda, CEO and Founder, Zapyle - one-stop online destination for luxury products.
Sellers at Kraftly, Kartrocket’s C2C marketplace, is offering discounts to liquidate their inventory. Kapoor says that he has seen tardiness in sellers to add new collection in their inventories. Kraftly represents a large portion of small sellers below 50 lakh annual turnover, of which a majority are below 20 lakh turnover.
Earlier VAT was not applicable to sellers with a turnover below Rs 10 lakh per annum and now it is expanded to include below Rs 20 lakh per annum. Under VAT, the Rs 10 lakh limit only applied for transactions which were within the same state of VAT registration. “We were hoping that under the new GST law the sellers below Rs 20 lakh limit will also be able to now sell to any state as GST claims to be “One nation one tax” tax law. But this is not clear in the GST documentation provided so far,” says Kapoor.
For instance, the announcement of GST has increased the administrative cost for the textile industry. Although, GST has increased the tax rate, on the other side it has now allowed claiming input credit which may be between 6–9 percent, Menda of Zapyle said. The textile industry is the second largest industry in India which provides skilled and unskilled employment. Though there is no excise tax on ready-made garments, the industry was still paying VAT of 5.5-6 percent and 7-7.5 percent for garments above Rs 1,000. The difference in the tax rate can be offset by embedded tax credit. Presuming the prescribed tax rate is higher than the current rate, it would be best to keep the existing stocks at a minimum since input tax credit on the current stock would be available at old rates but future supplies would be taxed at higher rates, suggested Menda.
As the government unrolls its much-awaited and also contentious programme, it is not just the small retailers who are on tenterhooks. The government’s one-tax-one-regime has also some of the big names in retail in a flux. “All we want is that our margins should be protected under GST,” said Rakesh Biyani, Joint Managing Director of Future Retail Ltd. “Wholesalers have agreed to pass on the benefits that they get from GST to the consumers, but we would reiterate that consumer companies should protect our post-tax absolute margins instead of only a percentage after GST is introduced on July 1,” he said.
Net direct tax collection in the April-June quarter of the current fiscal is over Rs 2.46 lakh crore, as against more than Rs 1.17 lakh crore during the same period of the previous fiscal
Shortfall in GST compensation to states in the current fiscal estimated at Rs 2.59 lakh crore, of which about Rs 1.59 lakh crore would have to be borrowed