Analysis by Elargir Solutions on Impact of GST in Retail Sector
Marking an end to the long and tumultuous debate on GST, the Rajya Sabha has finally approved the crucial Indian Constitutional amendment to turn the bill into law. The LokSabha had already passed the key bill. The bill will now go back to the Lower House to incorporate the amendments approved by the Rajya Sabha and will have to be approved by 50 per cent of all the state assemblies.
Retail Sector would be one of the highest benefiting sector from GST bill, waiting for long now to finish the cascading impact of taxes for the growth of the Industry. With GST, the journey from manufacturer to retailer and to end consumer would simplify and generate savings including the logistics, warehousing, distribution and retailing. While there are positive and neutral impacts on retail and related industries, many sectors like telecom would be adversely impacted. From a short term perspective, the GST might have a minor impact on the inflation; in the longer run it will reap more benefits for the economy attracting high investments across sectors.
For initial years, the central government would be managing the finance compensating all the states for 5 years incurring revenue losses. Before going into business technicalities, let us make you understand as to how it will have a direct impact on prices, with the following simple case of apparel sector.
- SCENARIO WITH GST FOR APPAREL/ GARMENT SECTOR VS.WITHOUT GST & NORMAL TAXES
- SCENARIO WITH GST FOR APPAREL/ GARMENT SECTOR
Stages of movement of product from manufacturer to retailer
|Buying Price||Value addition/Margin|
|Gross Value/ Selling Price||@10% Tax on Output||GST Incidence after set off the tax already paid|
|1.||Manufacturer buys Raw Material & accessories worth: Rs. 100|
|–||–||10 (Tax paid as part of bill for buying)|
|Processing Cost & his value addition: Rs. 30|
|3.||Finished product passes to Wholesaler||130||20||150||15|
Wholesaler passes to retailer
|Total GST on entire value chain|
Final Cost to the customer with tax is Rs. 166
- SCENARIO WITHOUT GST FOR APPAREL/GARMENT SECTOR
|Stages of movement of product from manufacturer to retailer||Buying Price||Value|
|Gross Value/ Selling price||@10% Tax|
|GST Incidence after set off the tax already paid|
|Manufacturer buys raw Material & accessories worth: Rs. 100||100||–||–||10 (Tax paid|
as part of bill
|Processing Cost & his value addition: Rs. 30||–||30||143 (100+30+13)||30 13 (10%of|
|Finished product asses to Wholesaler|
|Wholesaler passes to retailer|
|18.93 (10% of|
|Total tax on entire value chain in NO GST regime|
Final Cost to the customer with tax is Rs. 208.23
Compare final price to the user/customer under current cascading tax regime, it is Rs 208.23 with a tax of Rs 58.23. Whereas, the final price to the user/customer under the GST regime is Rs 166, which includes a total tax of Rs 16.
- DIRECT POSTIVE IMPACT ON RETAIL & RELATED INDUSTRIES SUPPORTING RETAIL
2.1. Rentals are one of the main costs of retail services sector attracting a service tax at 14.5% on total rental cost.
Currently, the retailers cannot set off these costs like the other industries. Under GST, taxes on services would be available for set off against taxes on goods. With this move, the tax burden to be paid on the rental would benefit the cash flow and profitability of the lessee and retailers.
2.2. Overall, Purchasing price explained in above GST scenario would reduce the tax burden and overall pricing & better margins.
2.3. Simplification of taxes and getting GST in the country would attract more FDI’s and FII’s investments, GST being the globally accepted tax structures.
2.4. Overall retail inflation would reduce, making industry more competitive with no cascading effect cutting across states.
2.5. FMCG sector with Companies like HLL, Colgate, would be able to generate benefits in logistics and distribution by eliminating the multiple sale depots and distributions centres. Currently, they pay around 25% taxes including VAT, entry tax and Excise duty and GST being @ 17-19% would be significant reduction in tax cost to them. As a result, a significant portion of direct benefits will be passed on to end consumers because of a highly competitive market.
2.6. E-commerce would get additional Push for growth by making processes Integrated across the country and elimination of cascading effect of taxes on customers bringing efficiency in the prices. GST would allow free movement of goods across country.
2.7. Automobiles service industry would have drop in prices by filtering the taxes.
2.8. Mobile phone & Handset prices likely to come down/even out across states. Manufacturers are also likely to pass on to consumers cost benefits they will get from consolidating their warehouses and efficiently managing inventory. For handset makers, GST will bring in ease of doing business as they may no longer need to set up state specific entities and transfer stocks to them and invest heavily into logistics of creating warehouses in each state across the country.
- NEGATIVE IMPACT OF GST FOR THE OTHER INDUSTRIES
3.1. For Pharmacy retailers, GST rollout could be negative, as it is likely to increase indirect tax. Indirect taxes paid by pharmacy companies could increase by 60 per cent and MRP by four per cent. This would increase the price of the Medicines for Consumers
3.2. IT companies can have several delivery centres and offices working together to service a single contract. With GST, companies might require each centre to generate a separate invoice to every contracting party. Duty on manufactured goods is going to go up from existing 14-15% to 18%, which means the cost of electronics from mobile phones to laptops- will rise.
3.3. Consulting Services, currently paying 15% as service tax would have the negative impact after high rate of GST @ 18-20%
3.4. With Insurance policies of life, health and motor costing more from April 2017 as taxes will go up by up to 300 basis points, it is going to affect the overall price to the end consumer
3.5. For food companies, if the recommended 40% “sin/demerit” GST for aerated beverages and tobacco products is levied and then prices may increase by over 20%. They many see increase in effective tax as many companies enjoy concessional rate of excise.
3.6. In Telecom sector, the Call charges, data rates will go up if tax rate in the GST regime exceeds 15%. Tower firms won’t be able to set off their input duty liabilities if petro-products continue to stay outside GST framework.
3.7. Key petroleum products like crude, natural gas, high speed diesel and ATF have been kept out of GST. Clarity is awaited for others. Compliance costs are likely to rise because of dual indirect tax mechanism.
3.8. GST will be negative for wind, turbine generator manufactures like Suzlon and InoxWind, as pressure on developer margins and internal rates of return could eventually force reduction in prices and realisations, up to 10-13 per cent. However, if components are included in the exemption list, the impact of GST will be nullified.
3.9. In Utilities Exclusion of “sale of electricity” from GST could potentially raise the cost of coal-fired and renewable energy for Discoms. Profitability of independent power producers selling via medium/long-term PPAs is unlikely to be dented as cost escalation would likely be passed on.
- TAXES GST WOULD REPLACE
4.1. Central taxes that The GST will replace
4.1.1. Central Excise Duty
4.1.2. Duties of Excise (medicinal and toilet preparations)
4.1.3. Additional Duties of Excise (goods of special importance)
4.1.4. Additional Duties of Excise (textiles and textile products)
4.1.5. Additional Duties of Customs (commonly known as CVD)
4.1.6. Special Additional Duty of Customs (SAD)
4.1.7. Service Tax
4.1.8. Cesses and surcharges in so far as they relate to supply of goods or services
4.2. State taxes that The GST will subsume
4.2.1. State VAT
4.2.2. Central Sales Tax
4.2.3. Purchase Tax
4.2.4. Luxury Tax
4.2.5. Entry Tax (all forms)
4.2.6. Entertainment Tax (not levied by local bodies)
4.2.7. Taxes on advertisements
4.2.8. Taxes on lotteries, betting and gambling
4.2.9. State cesses and surcharges