Under GST, supply of goods by one person to another without consideration could also be liable for taxation. This would lead to increased cost of promotion schemes like ‘buy one, get one free', etc
The goods and services tax (GST) is one of the biggest tax reform that the country is about to witness. Presently, goods are liable to various taxes/duties such as basic customs duty (BCD), countervailing duty (CVD), special additional duty (SAD) on import, central excise duty on manufacture, value-added tax on intra-state sale, central sales tax on inter-state sale, entry tax on entry of goods into local area, etc. and services are liable to service tax. All of the above taxes and duties except BCD would be subsumed under GST.
Recently, there has been significant development on the GST front. The draft Model GST law had been released on June 14, 2016. Subsequently the Constitutional Amendment Bill empowering the Centre and the states to levy GST on goods and services had been passed by Rajya Sabha on August 3, 2016 and the amendments made in the bill were passed by Lok Sabha on August 8, 2016. The next step would be that majority of the States in India would have to ratify the said constitutional amendment bill. The states of Assam, Bihar and Jharkhand have ratified the constitutional amendment bill (as on August 17, 2016).
GST would have significant impact on the way businesses operate and one of the sector which would be significantly impacted by GST is the retail sector. The key impact areas of GST (based on the draft Model GST Law) on the retail sector has been highlighted in this article.
Increased availability of input tax credit
At present, the CVD paid on import of goods, excise duty paid on goods manufactured in India, CST paid on inter state procurement of goods and service tax paid on input services, are currently are a cost to the retailers. However, the GST charged on the aforementioned transactions would be creditable. This would eliminate the cascading effect of taxes and could lead to reduction in effective tax cost for various products.
Having said this, there are certain products on which the current effective tax rate is low. A higher rate of GST could offset the benefit of increased credit availability mentioned above and lead to higher tax cost. The industry is eagerly waiting for the final GST rates to be out and is expecting that such products are exempted/liable to lower rate of tax, so that the effective price of goods are not impacted.
Further, for the industry, free flow of credits could culminate into simpler supply chain.
Increased working capital requirement
Inter-state stock transfer of goods from one branch to another is presently not liable to tax. However, the same would be liable to GST. While this would not be a cost in the system, this would increase the working capital requirements of the retailers.
Retailers currently offer various marketing schemes such as “Buy one get one free”, free samples, etc, to customers. At present, the products given free of cost are not liable to sales tax. However, in the GST regime, supply of goods by one person to another without consideration could also be liable for taxation. This would lead to increased cost of promotion and also pose a challenge as regards the valuation to be adopted for calculating GST on such goods.
Check-post related compliances
Movement of goods within the state and from one state to another entail stoppage of goods at check-post for verification which leads to inefficiencies in the transportation system, increased cost due to halting and compliance hassles for the business. Under GST, given that entire India is a single market place, it is hoped that the way bill requirement and check-post compliances should be done away with. However, the model GST law empowers the government to prescribe documents to be carried along with consignment of goods having value above R50,000. Accordingly, the retailers may have to cope with way bill and check-post compliances even under the GST regime.
In addition to the above, some of the other impact areas are transition of existing credit under GST, applicability of GST on sale of gift vouchers / coupons, determining the correct place of supply in order to pay the taxes to the appropriate government, to name a few.
It may also be noted that there a series of steps to be completed by the government before the GST is implemented and the government is relentlessly working towards ensuring that GST is made effective April 1, 2017. Given this, it is imperative that the retail industry gears up for GST so as to ensure that they smoothly transition into this landmark tax reform.
The Author is Pramod Banthia, partner and Feneel Shah, associate director (indirect tax), PwC India. With inputs from Ankit Bachhawat, manager (indirect tax), PwC India. Views are personal.