GST implementation: a retailer’s questions

GST implementation: a retailer’s questions

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At the start of the new millennium, in the year 2000, the then Government headed by Mr.Atal Bihari Vajpayee, started discussions to introduce a unified rate for indirect taxation. After 16 years of working papers and deliberations, the GST Bill was signed by the President of India on 8th September 2016. The law is proposed to be effective from 1st April 2017.

The apparel industry in India is the 2nd largest employer after agriculture. While the rate of taxation, input credit, minimum amount of turnover eligible for exemption and roll out plan are being finalised, it is important to review how GST will impact the retail industry in readymade garments.

The current situation in Maharashtra is shown below:

Different taxes on purchase Goods purchased and sold in Maharashtra Goods purchased outside, sold in Maharashtra Goods purchased outside, sold outside via Maharashtra (e-commerce) Goods purchased in Maharashtra, sold outside (e-commerce)
CST NA Yes 2% Yes 2% NA
Octroi NA Yes 3% Yes 3% NA
VAT Yes 5% NA NA Yes 5%
Tax on Sale Yes 5% Yes 5% Yes 5% Yes 5%
Total Taxation 10% 10% 10% 10%
Proposed GST Rate 18% 18% 18% 18%

cst-invoice

octroi-bill

vat-invoice

Abhay Pethe, professor in urban economics and regional development in the University of Mumbai shares in an article, “The whole point is that the reform will unleash such positive forces of growth that the actual buoyancy in tax revenue for both central and state governments, is likely to be far higher than the current static calculations. In other words, a lower actual rate than the computed revenue neutral neutral rate should be acceptable once the impact on future economic growth is taken into account.”

The essence of GST is convergence i.e. all the indirect taxes applicable on goods and services will merge into a unified tax. As a retailer, I put forward my questions to understand the implementation better.

  1. Tax burden: Currently, CST and VAT on purchase are borne by the retailer. Credit for VAT is available to the retailer. Octroi is paid by the retailer, which cannot be claimed against any other tax. In case of GST, who is suppose to pay the tax?
  2. Tax credit: Currently, the retailer claims set off in case of VAT. In case of GST, who will claim the credit for the tax paid, both CST and VAT?
  3. Inter-branch transfer: Eg: A retailer in Bombay, sends goods to their branch in Bangalore. The VAT rate in Maharashtra is 5%, whereas in Karnataka is x%. Under GST, how will the transfer and sale be taxed?
  4. Applicability: CST, Octroi, VAT on purchase are applied on the cost price of goods, whereas VAT on sale is applied on the maximum retail price. Under GST, the tax rate will be applied on cost price or sale price?
  5. Compliance: What are the timelines for paying the tax and filing of returns?
  6. Intent: It will be interesting to know how the unified rate will be distributed between the state and centre. Also, how will this revenue be used to build infrastructure to ensure smooth trading activities? Within the state, eg: Maharashtra, questions arise as to how the tax will be distributed among local bodies.

Technology is a huge enabler. A balanced system which looks at the macro and micro picture, syncs interests of logistics and trade while keeping the consumers in mind will be a great feat accomplished. This can be achieved through the use of technology.

The Government has to ensure that there are no shortfalls in revenue with the unified rate. At the same time, it is also important to not over-tax the industry. The impact of GST is going to be far and wide; from pricing decisions to location of manufacturing and warehousing facilities, supply chain and sourcing decisions. Keeping the interests of the end consumers, traders, manufacturers and the treasury; the Government must incorporate a system that is win-win for all the stakeholders.

Disclaimer:

The points highlighted and questions asked are in context of my business. We source garments from across India. For sales, we have a hybrid business model, with a brick and mortar store in Bombay and e-commerce operations panning India.

GST implementation: a retailer’s questions

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