Of the sectors which could benefit from the introduction of GST, one of them surely is retail. As per the report of the India Brand Equity Foundation (IBEF), the country’s retail market is expected to reach $1-trillion mark by 2020, driven by income growth, urbanisation and attitudinal shifts.
GST will subsume various indirect taxes including excise duty, service tax, VAT, sales tax, luxury taxes, entry taxes, state entertainment taxes, countervailing duty and additional customs duty.
A typical consumer durable product currently attracts excise duty at 12.5% and VAT at 13-14%, totalling an effective tax rate of around 26%. If the tax rate under GST reduces to 18-20%, the same should be beneficial to the retail sector, opening up opportunities to revisit the pricing and go-to-market strategy.
The retail sector has borne the brunt of leakage of credit of taxes paid on procurement of goods and services under the current regime. One of the major expenses incurred by retail chain outlets are rentals of premises and malls. Under the current tax regime, service tax paid on rentals and various other services are not available as credit to retail chain outlets. The introduction of GST would make taxes fungible and thereby help retailers to offset taxes paid on procurements against GST on output supply. This would have a positive impact for the retail sector.
Tax treatment on promotional schemes such as ‘buy one get one free’ would need to be clarified by the government. While the model GST law could be interpreted to suggest that such promotional schemes should not bear additional tax burden, the industry would hope to have upfront clarity on the same to avoid litigations in the future.
While no decision has been taken yet on the treatment of excise-free zone units under the GST regime, there is a possibility that excise exemption schemes could be converted into refund schemes. Tax treatment of excise-free zones would be an area to watch out for and could have an impact on the industry.
The next generation retail markets would be majorly driven by e-commerce. The sector is experiencing a huge turnaround with Indian players thinking big and global and global players trying to lay hand on the Indian market. The same would certainly lead to a competitive market. The model GST law has envisaged the importance of the rapidly growing e-commerce sector and has made specific provisions in the draft law for administering the taxation of the sector. The model GST law provides for the collection of tax at source on payment/credits made to vendors using the e-commerce platform for selling. The introduction of GST should ease e-commerce players from operational issues under the current VAT regime, requiring them to get registered as a dealer in various states.
From a supply chain standpoint, companies would seek to revisit the existing distribution network in order to optimise tax costs, working capital impact, while ensuring that customer satisfaction is not compromised thereof.
The introduction of GST will also warrant upgrade and modification in the IT systems of companies in terms of recording of transactions, changes in IT masters, tax coding systems, invoicing formats, formats of sales and purchase register and so on. It needs to be ensured that the information captured is in line with statutory requirements under the GST law and enabled for 100% compliance of the GST law.
Inventory valuation would be impacted consequent to the introduction of GST. Even the internal MIS reporting and budgets may go through a change, as certain taxes which are expensed currently would get subsumed in GST.
The retail sector would have goodies to take home with the onset of GST. However, it would be imperative to be prepared for the transition, considering that the cutover date of April 1, 2017, is only a few months away, leaving the sector with barely enough time to chalk out a plan of transition. The new tax law would have an impact on prices, business processes, IT systems, supply chain and profitability, and it is imperative for the industry to ensure they avail of this transformational opportunity. Make hay while GST shines.
(Ravikumar Yanamandra, tax director, EY, also contributed to the article)
The author is tax partner (retail & consumer products practice), EY. Views are personal