Evolution of brick and mortar & eCommerce post GST bill

India's B2B e-commerce market is expected to reach $700 billion by 2020 whereas the B2C market is expected to reach $102 billion by 2020.
Retailing post GST

About a decade ago, brick and mortar stores were synonymous with retail sales in India. But over the past decade, retail sales in India have been reorganised in the advent of e-retail. The e-tail form of retailing is expected to be at par with the brick and mortar stores in the next five years. India’s business to business (B2B) e-commerce market is expected to reach USD 700 billion by 2020 whereas the business to consumer (B2C) e-tail market is expected to reach USD 102 billion by 2020

However, with the stiff competition from e-tailers, the brick and mortar stores have scaled up by providing increased customer services to the end consumer. With the help of aggressive promotions and a strong demand for fresh merchandise the brick and mortar sales are now providing tough competition to the e-tailers. Even though brick and mortar stores and e-tail can be broadly categorised under the retail sales segment, there are many factors i.e. taxation, customer profiling, reach, accessibility etc. that differentiate one from the other.

Tax implications on brick and mortarstores and e-tailing under current and GST regime:


Under Current Regime

Under GST Regime

Taxes andTaxable Event

· Excise duty - Manufacture of goods

· Value-added tax (VAT) - Intra-state sales of goods

· Central sales tax (CST) - Inter-state sales of goods

· Basic Custom Duty – Import of Goods

· Additional Custom Duty – Import of Goods

· Central GST and State GST – Intra-state supply of goods/service

· Integrated GST – Inter-state supply of goods/service (imports will be considered as inter-state sales)

Tax rates on retail sector

 Inter-State tax = Excise (12.5%) + CST (15%)*

 Intra-State tax = Excise (12.5%) + VAT (12.5%)


* Note: CST will be charged at a higher rate as the buyer does not furnish C-form


Inter-State tax = CGST (10%)*+SGST (10%)*

 Intra-State tax = IGST(20%)*


* Note: Taxes are assumed to be at 10% and 20% respectively. Also, it is assumed that the IGST rate will be equivalent to CGST + SGST rate.


Gauging the tax variable – today and tomorrow
Assuming that every other differentiating factor is constant one can always observe tax variability between brick and mortar sales and e-tail sales. As a pattern it is observed that e-retail sales are primarily driven by inter-state sales and brick and mortar sales are primarily driven by intra-state sales. For instance, in a typical B2C situation, a perfume bought from a brick and mortar store in Maharashtra would levy 12.5 per cent VAT, whereas the same perfume would attract CST-15 per cent (no C-form) if purchased online from Gujarat. Thus, tax variability between the two options is almost present in every other transaction. Hence, under the current regime, one can always observe a difference in tax rates between the two options which usually influences the purchase decision of the buyers.

On the contrary, GST will propose uniform tax rate across the country. It can be expected that tax incidence on inter–state sales and intra-state sales will almost be equal. The probable uniformity in intra-state tax and inter-state tax in the GST regime is likely to make the customers indifferent as far as ‘influence of tax’ on purchase decisions is concerned.

Key takeaways of GST for the retail sector

i. Tax collection at source for e-commerce: The Model GST Law casts an obligation on every electronic commerce operator to collect tax at source and deposit applicable GST when payments are to be made to the supplier. This will increase the compliance burden on electronic commerce operators, as many of them have a large number of vendors. This provision is likely to hamper the growth of e-tailers.

ii. Free supplies to be taxable: Under the Model GST Law, the supply of goods or services by a taxable person to another taxable/non-taxable person in the course of furtherance of business is deemed to be supply for charging GST, even though the transaction is without any consideration. Accordingly, it could be inferred that GST will be applicable on the free supply of goods made to the customers under promotional offers or otherwise. Furthermore, barter transactions are also covered under the term ‘supply’ under the Model GST Law and therefore exchange offers may also attract GST.

iii. Post supply discounts will be included in the Value of Sale: Under the Model GST Law, post supply discounts would be included in the value of taxable supply (except where it is known beforehand). Accordingly, in case of sale of goods at a discount, the operator/seller may be required to charge tax on full value of price and not the discounted price under the GST regime.

iv. Reduced cost burden. The availability of seamless tax credit throughout India will drastically reduce the cost of sourcing, logistics, warehousing and distribution.  The elimination of tax cascation at various levels of value chain will further slice the cost of the final products. Thus, both e-tailers and brick and mortar stores stand to benefit from the unification of taxes in India (GST).

Way Forward
At present, e-tailers are able to leverage the digital retail channels (e-commerce), which enable them to spend less money on real estate while reaching out to more customers in tier-2 and tier-3 cities, whereas large players in the brick and mortar sales have also scaled by enhancing the shopping experience of the buyers. Under the GST regime, where the tax implications on both e- retailers and brick and mortar stores would probably be the same, factors other than tax (as discussed above) will probably play a major role in influencing purchase decisions of the buyers.

The onus is now on the both the brick and mortar and e-retailers to streamline their business in such a manner that they are able to avail every benefit in the form of exemptions, incentives, refunds, etc. to remain afloat in this competitive sector. Retail players will have to actively engage themselves in the GST transition process to optimise their supply chain and procurement channels to ensure that they have a costing edge above their competitors. With the GST roll-out of April 2017, just around the corner, retailers may have to start planning their GST related transitions at the earliest.

Authored By:Pratik Shah, Partner – Indirect Tax, SKPBusiness Consulting LLP and Ravi Soni, Executive, SKP Business Consulting LLP.

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