RUN-UP TO GST. Organised retail, neighbourhood shops a worried lot

If there is one sector that is worried the most about the Goods and Services Tax (GST), it is the retail industry. It is not sure what to expect from July 1, when the new tax regime kicks in. This is not just the organised retail, but the neighbourhood mom-and-pop shops too.

A Kolkata-based area sales manager for FMCG major Patanjali says they have been asked to clear stock from godowns quickly. Patanjali is not offering discounts to the retail stores or the neighbourhood shops. In contrast, VLCC, with nearly 30 per cent of its ₹1,000-crore revenues coming from FMCG, is giving double-digit discounts to its retailers and wholesalers to help liquidate stocks.

Vandana Luthra, Founder and Mentor, VLCC, says: “We are liquidating stocks. In some cases we have discounted our offerings for the trade and at the retail level too, while we are alternatively using our older offerings as samples and testers. By July we should have fresh stock ready.”

For the wholesalers too, it is not going to be a smooth transition. They will get supplies only if they are registered on the tax network. A wholesaler for an FMCG major voices the sector’s concern when he says, “I need to register on the network first. Once that happens, I come under the tax net. Moreover, I cannot pass on the discounts to mom-and-pop stores.”

Wholesalers say companies with direct distribution model will benefit in the GST regime. Mahesh Singhania, Chairman, Federation of West Bengal Trade Associations, says wholesalers are apprehensive of not knowing how to account for unused stock as on June 30. Hence, they have stopped stocking in this 15-day period.

“Wholesales are pushing for smaller value packs within ₹50 price bracket and not just sachet offerings,” according to Debanshu Dey, who owns a neighbourhood store in central Kolkata.

Neighbourhood stores are worried about prices and discounts. As Naresh Jana of Adi Mahakali Stores, a neighbourhood store in North Kolkata, puts it, the concern is whether wholesalers will pass on the same level of discount as they used to do earlier. Indication from wholesalers is discounts will be squeezed.

Jana explains: he used to buy a ₹100 product (marked price) at ₹90 from the wholesaler, which he would sell at ₹94. Now he may have to sell at ₹100 only.

“It is not stocking that worries me, but whether I can retain my margins. If I do not offer the discounts, I am bound to lose some of the customers to the organised retail that will have bundled offers,” Jana says.

Many retailers in consumer electronics have brought down inventory levels. Shankar BK of Chennai-based retail chain Viveks, says the company has reduced stocks levels by 25 per cent. Vendors have informed them that there will be 2-3 per cent increase in base prices for most consumer electronics, which is likely to affect demand.

The question most of them have now is what will happen to existing stock. Most companies stock goods 6-7 weeks in advance. “By the time GST is implemented, we will have 2-3 weeks worth of stock,” Shankar says. “It is already a loss for us,” he adds.

Kumar Rajagopalan, CEO, Retailers Association of India, says in electronics, watches, luxury goods and white goods categories, retailers are wary about GST. In cases where stocks can take 1-2 years to be liquidated, retailers have slowed down on getting new inventory because GST rules state that existing stock should be liquidated within six months to receive input tax credit.

However, Anshul Singhal CEO, Embassy Industrial Parks, says the issue of payments getting stuck and stockists not lifting materials should not be a cause of concern. “There is more smoke and less fire and this is the handiwork of a few rotten apples,” he said. Contrary to the opinion that GST will help large companies, Singhal said that it will help smaller companies too. “Simplification of procedures, related to cost and freight will help small mom-and-pop shops,” he said.

Singhal also pointed out that this will help in more FDI inflows. “I was in Germany last week and there are companies that want to come to India but are worried about the tax structure. Once GST rolls out they will consider making additional investments in the country,” he said.

Amazon India’s spokesperson says the company’s priority is to enable its systems to be compliant with all regulations. “We don’t see any signals of sellers depleting their inventory. We have also launched ‘A-Z GST Guide’ programme that has trained and enabled thousands of sellers to get ready for GST through tutorials, blogs, free online training sessions and paid professional support from third-party service providers,” he says.

Nikhil Ranjan, founder and Managing Director, William Penn, a premium chain of 30 stores for writing instruments and business lifestyle accessories for men, says most retailers, including William Penn, will try to sell whatever stocks they have. He said, VAT on writing instruments goes up to 12.5 per cent across States, but in most States it is at 5.5 per cent. “If we buy stocks this month, we will have to incur a huge loss with the 28 per cent GST,” he adds.

The real estate sector expects at least a dozen warehousing hubs coming after the transition to GST, with warehousing space itself expected to increase by nearly 20 per cent this year to 132.5 million sq ft.

“We are likely to see an increase of Grade-A and Grade-B warehousing stock across the country in the next few years mainly from new locations,” says Ramesh Nair, CEO, JLL India Implementation of the GST, is probably the biggest trigger to warehousing segment in India, explained Srinivas N, Managing Director - Industrial Services, JLL India. “The investment in the warehousing sector is estimated to be ₹4,500-4,700 crore in 2017.

Despite the delayed start of migrating to GST in the South, the southern States are way ahead in terms of getting the login id and password for dealers and their enrolment, says Rajan Khobragade, Commissioner, Commercial Taxes, Kerala.

Most important here is the number of traders who have completed uploading all data by using the e-sign or the digital signature certificate (DSC).

At 62 per cent, Kerala has topped all States in this regard. This means that the migration of as many dealers has been completed.

Ashok Nawany, Chairman, Nawany Corp, with interests in construction and transportation, said that there is an air of uncertainty in the market due to the implementation of GST. Companies are holding on to their inventory. Given the complicated nature of GST reporting to tax authorities, the companies will incur huge cost for tax compliance.

With just a few days left for GST rollout, industry is concerned over the implementation of the e-way bill, which makes online pre-registration mandatory for movement of goods worth over ₹50,000.

Mitesh Prajapati, Director, Sameer Steel (a division of Ramanlal Prajapati & Sons Steel India), said given that India is a huge market, a sale of ₹50,000-per consignment is not an occasional incident. Industries such as steel and metals, businesses thrive on big turnovers and not on big profit margins, he said.

“Thus, goods worth lakhs of rupees are bunched together and sent as consignment to cut down on logistics expenses. A small business owner with little computer knowledge and patchy internet access cannot be expected to spend valuable business time to make online registrations for e-way bills,” he said.

Highlighting another distressing rule under GST where the seller has to bear 18 per cent GST that a buyer defaults paying, Prajapati said, “Small businesses have been suffering a blow of VAT evading buyers, but at 5 per cent, the damage was still bearable. However, with 18 per cent tax for the business that is surviving on a margin of 6-7 per cent, the upshot of a defaulting buyer can a be major loss.”

“As someone engaged in manufacture, supply and retail, I understand the impact across the entire chain. Traders are unsure as to how it would impact them when goods purchased from a factory in April and May are sold in July and August. Therefore, they do not want to carry the inventory for a longer period,” said Devendra Surana, President, FICCI Telangana.

Prakash A, President, TS Federation of Chamber of Commerce and Trade, says while one tax, one nation is good in the long run, the transition phase has been extremely trying for the traders.

“The ground reality is it has become a very big issue for them as barely about 11 per cent of the trading community has computers. In the GST regime, it provides for regular filing complicating the matters,” he said.

R Radhakrishnan, former President, Builders Association of India, said confusion has slowed down the progress of many projects.

Under current tax regime, builders pay excise duty of 5-15 per cent, service tax of 14.5 per cent and 2-12 per cent VAT for materials. After GST, materials will have a single tax between 5 and 28 per cent. “We are yet to get clarification on tax details for each material,” Radhakrishnan said.

There is no clarity on reimbursement as well. People who have already purchased materials might end up paying 30-35 per cent more tax as information on input credit is not clear. This has stalled construction in some areas, he added. It is likely to strain buyer and seller relationship as price rise will be passed on to consumers, who are not going accept it easily, he added.

(With inputs from Abhishek Law, Kolkata; Ch RS Sarma, Visakhapatnam; V Rishi Kumar and KV Kurmanath, Hyderabad; R Balaji, Swathi Moorthy and G Balachandar, Chennai; Meenakshi Verma Ambwani and TV Jayan, New Delhi; Rahul Wadke, Suresh P Iyengar and Tanya Thomas, Mumbai; Vinson Kurian, Thiruvananthapuram; V Sajeev Kumar, Kochi; Anil Urs, Venkatesh Ganesh and Sangeetha Chengappa, Bengaluru)