“I am not from a retail background,” American businessman and investor Edward Lampert, who was bullish on retail stocks, said. “But I am a shopper,” he added. So it is with the Goods and Services Tax (GST). The success of a consumption tax ultimately depends on just that — consumption. The retail sector is one of the most crucial of crucial linkages to determine the buoyancy of GST – because like Edward, everyone is a ‘shopper’. That said, let us look at how GST has impacted the retail sector from July 2017. The first few months saw the retail sector facing common upheavals in undertaking compliance. Having peculiarly large inward and outward supplies, retailers were faced with the daunting prospect of huge volumes of uploads in the yet untested GST portal.
Further, given that the core business model involved frequent sales returns, matching of credit notes with original invoices, as envisaged under the GST law, posed yet another challenge. Pre-GST sales returns added to the complexity, as the customer was apprehensive to issue GST invoices on account of purchase returns. Given the complex task at hand of transitioning into a new tax regime, the sector has coped admirably. However, a few practices which were standardised in the segment would come to be tested on the grindstone of GST. The all too familiar scheme of ‘buy one get one’ offers, which tantalized cost-conscious customers was dimmed by the prospect of being taxable either directly as a supply or indirectly by means of credit reversal under GST.
To the credit of the GST council however, the issue is under discussion, and a favourable clarification is highly anticipated. Perhaps the council should also provide clarification on a similar industry practice — that of providing assets such as refrigerators and containers, down the retail chain. Further, in a sector where annual discounts and festival discounts take centre-stage, the difficult task of linking each credit note with the underlying invoice may be dispensed with entirely, given the amendments to the GST law and rebooted compliance process. Among the expenses incurred by retailers, a bulk of spending goes towards advertisement and rental services.
High input tax credit paid on such expenses leads to accumulation of credit, especially in scenarios where there is a lower rate of tax on output goods. These cannot be claimed back as a refund, as the computation of ‘inverted duty structure’ does not include input services, leading to an in-built tax cost for many retailers. The impact on startups is even greater, as advertisement is at the core of their endeavour of brand building. Further, several costs are incurred down the distribution chain, which in the normal course are claimed as reimbursement by channel partners. The prospect of GST applying on the same is likely to increase tax cost and further compliance burden.
Anti-profiteering remains the elephant in the room so far. The long arm of the law stretches far indeed. Given the same, the fact that much uncertainty remains over its exact mechanism, there could be trying times for retailers. It is right to say that benefits on account of GST must be passed on to customers, but this leads us to several still open questions:
• How exactly would a retail outlet quantify the exact benefit accruing from not just the transitional credits but the host of rate cuts introduced by the GST council?
• Should anti-profiteering be computed at the business level, entity level or product level? The current dispensation favours the product level, which has led to a huge activity of quantification of benefits at large conglomerates with diverse product offerings.
• Who takes the responsibility of passing benefits to customer? Is it the brand owner, distributor or retailer?
The government must be given due credit for having resolved few fundamental issues from time to time. This gives the hope that issues simmering under the surface could be swiftly tackled. The GST council has also taken the extreme position by cutting rates across the board to accelerate consumer sentiment. In the run up to the festive season, it is essential that retailers vet their processes and documentation to ensure there is no regulatory dampener to sour the gains. Indeed, it is necessary to drill down to every detail — to boost retail.
Praveen William, Partner, Indirect Tax, KPMG in India, sheds light on the impact of Goods and Services Tax (GST) on the retail sector