Google News

Demonetization and introduction of GST: A perspective for the retail sector

Must Read

Considering the size of the population and year-on-year spurt in per capita spending of emerging middle class makes the Indian retail sector one of the biggest sectors in the India economy. A feather in the cap is the emerging e-commerce space and also the untapped rural market which has caught the attention of the world by sheer potential it holds in the future considering the size of this market.
Though retail sector foresees a year-on-year growth rate of 35 per cent, it has generally grappled with various challenges including inflation, new competitors, complex regulatory and taxation framework, inadequate infrastructure for distribution of goods, foreign direct investment policy of India etc..
Recently, the two main developments in the Indian landscape that have/will impact the sector are Government’s stand to introduce Goods and Services tax (GST) and the draconian announcement of demonetization of Rs 500 and Rs 1,000 notes. Weighing the benefits it brings in the long run, introduction of GST has been much appreciated by the industry in this sector. However, the move of demonetization has brought mixed reactions.
With the objective of curbing corruption, terrorism, black money and counterfeit notes, people have appreciated the decision, however, the manner of execution of this decision has caused a lot of inconveniences to various stakeholders in this sector. The reason being that the frequency of cash transactions are much higher in retail than perhaps in any other sector as retail sector is predominantly operated by local kirana stores, owner-manned stores, footwear shops, apparel stores, paan and beedi corner shops, chemists and handcart and pavement vendors etc.
Immediate reduction in money supply (inadequacy of sufficient cash and small denomination currency) has led to local retail shops as well as malls wearing a deserted look. The move has clearly brought a slowdown in the discretionary spending that includes purchase of white goods, high-end fashion items, luxury goods etc. Even for e-commerce industry where more than 60 per cent of the business is through cash on delivery (COD) basis, this move has caused a lot of order to be returned due to unavailability of money. This eventually causes further reduction in the demand for goods of e-tailers as well.
The flip side of this move is the encouragement/ spur in the alternative forms of payment that include payments through e-wallets, online transactions through debit/ credit cards, use of net banking etc. With more and more digital payments happening, the sector is going to get transparent. However, the lack of infrastructure as well as knowledge of such alternative forms of payment to masses could only benefit a few.
Only after the dust settles and there is sufficient money supply, will this sector see any upside provided that this move should not have a ripple effect resulting in a sluggish economy. Different economists have had their views on the effect of demonetization on the overall GDP growth and majority of them have lowered the numbers by a fair margin if not too harsh. However, there is a strong feeling that the burgeoning Indian middle class population coupled with favourable demographics shouldn’t let this downturn continue for a long time.
Will the Goods and Services Tax (GST) proposed to be implemented from April 2017 prove to be a short in the arm for the retail sector that’s currently bleeding with Demonetisation?
The overall efficiencies that GST will bring in the ecosystem such as improving the supply chain across India, removal of state barriers leading to faster and efficient movement of trucks for transportation of goods, removal of taxes at various levels leading to better margins and inter-fungibility of taxes across goods and services will lead to a massive growth of the retail sector.
One can say that to everyone’s surprise, the Government’s preparation for GST has outpaced the preparedness of the industry. This can be seen by various facts such as the Government putting up the bill in winter session of the parliament, assessees in various states have been requested to obtain registration under GST in a phased manner, weekly meetings of GST Council etc. whereas the industry is still familiarizing itself with the laws, rules and regulations which have been released in public domain.
The impact on retail sector will be multi-faceted as under the current regime there were various implications regarding valuation of goods, volume discounting, varying VAT rates across states, taxation on free of cost supplies, availability of credit etc. on different business models in this sector.
Under the proposed GST structure, it was expected that the law will uphold the overall objective i.e. bring clarity to prevalent issues, reduce unnecessary litigation, widen the tax base, reduce the tax cost and ease the burden of compliance on various stakeholders in this chain. With the new law in the public domain, it is clear that the Government has achieved the overall objective, however, certain issues still require attention before the new tax regime is implemented.
The ‘Anti-profiteering clause’ inserted in the revised GST law may be a cause of concern for the industry. Proving to the revenue that no additional profits were pocketed on account of taxes might be a nightmare for the industry to prove unless the Government comes out with very specific and clear guidelines.
The GST should also bring smiles on the face of e-commerce players since these players were grappling with a plethora of regulatory and tax issues including entry tax, movement of goods inter-state and on their classification whether they are goods seller (subject to VAT) or as majority of the e-commerce players treated themselves – mere service providers, subject to service tax.
The draft GST law seeks to provide enough clarity on the above issues though, by way of making them liable to collect tax at source (‘TCS’), the e-commerce portals are definitely going to get involved in a mammoth compliance work of deducting taxes, its payment, filing of separate return and ensuring monthly reconciliations with all the vendors.
One of the most important issues to be managed by retail sector including e-commerce players is overhauling the IT/ERP systems. IT is going to play a massive role in ensuring the correct and true benefits of GST and action at the right time is a must. It will also be worthwhile to look at how the competitors in the unorganized sector will get impacted under GST and will that mean any additional revenue/margins for companies. With the annual threshold limit getting drastically reduced to 20 lakh, a large number of unorganized players will be forced to come inside the tax net, thereby creating a level playing fi eld for the organized players.
It is indeed a challenging and an exciting time for the industry and the retail sector is not spared with its share of excitement. Organizations need to closely monitor the developments taking place in both, tax and regulatory environment and take adequate safeguards. The CEO and CFOs need to get sensitized with the developments including understanding the impact of GST on their operations and how they need to cope up with such reforms.

Latest News

Retail sales grow 8% y-o-y in March 2024: RAI Survey

According to the survey, sports goods reported a growth of 11% followed by apparel and beauty showing a growth...