The main reason to implement GST was to abolish the cascading effect on tax, with GST there is only simplified and cost saving system as procedural cost reduces due to uniform accounting for all types of taxes. Only three type of account; CGST, SGST & IGST have to be maintained. GST implications are observed on almost all sectors, through this blog we would be looking into the Impact of GST on Trading Sector.
1. For Wholesalers:
The wholesale market is fundamental to extending the reach of goods and services to the interiors of the country, especially the rural markets. Most wholesalers operate in cash transactions because of which there is a good chance that some transactions are not accounted for, which was previously a concern but ceases to be one under GST.
Given below are the main advantages that GST brings to wholesalers.
- Transparent tax management: The introduction of technology into the taxation system can be a blessing in disguise, an opportunity to bring about transparency in tax management. Rather than relying on cash transactions, wholesalers will now get an opportunity to go digital. They will also be able to avail the facility of input tax credit. Input tax credit is where the businessman will be able to claim tax on all input goods and/or services.
- Financial streamlining: Because the entire supply value chain including tax flows will be on GST records, wholesalers will be better connected to retailers and suppliers. This will make it easier to process payments and get tax returns in a timely manner, thereby improving the cash flows of traders. A reliable positive cash flow will help build confidence in the new regime, by making working capital available and aiding opportunities to grow the business.
- Reorganization of supply chain: GST will enable high visibility and streamlining of the supply chain, providing wholesalers with a transparent view of supply movements. This will aid business efficiency in the long run.
- Ease of borrowing through digital lending: Because financial and tax transactions will now be recorded in the GST system, even small traders will have digital records of their company finances and credit status. These digital records will act as a ready reckoner of information when a trader opts for a loan. Financial institutions and online lenders like Capital Float can now easily assess the loan eligibility of small traders such as Kirana owners by accessing this data, and provide them quick and easy loans. Borrowing funds online and doing business will now be easier.
2. For Retailers:
Almost 92% of the retail sector in India is unorganized, operating in cash payments. They are, essentially, the tangible representation of FMCG multinationals to end-consumers; yet they are challenged by chronic issues such as the lack of technology enablement and low operating margins. A majority of the retail market consists of “kirana stores”, which are often the smallest link of the trade chain.
Here are the benefits of the new taxation system for retailers.
- Input tax credit facility: As mentioned for wholesalers, retailers too would be able to claim taxes paid for input products and services availed. This will present a cost advantage to retailers.
- Ease of entry into the market: The market is expected to become more business-friendly due to the clarity of processes related to procurement of raw materials and better supply logistics. This is a good opportunity for new suppliers, distributors and vendors to enter the market. The registration process has also become very clear under the GST, aiding entry into the market.
- Retailer empowerment through information availability: Small retailers often do not have complete visibility into their stock receipts, payments, etc. and are forced to blindly rely on the word of the supplier. GST will streamline these supply and cost challenges and empower the retailer with readily available information through digital systems.
- Better borrowing opportunity: The retailer scope for business growth can be increased by increasing the retailers’ access to finance.
However, like any new reform, there are certain challenges that need to be addressed. We see that both retailers and wholesalers must manage the following eventualities of GST implementation.
- Higher costs of input services: Input services such as manpower, legal, professional services, auditor services, travel expenses, etc. will now be taxed at 18% as against the earlier bracket of 15%, leading to higher costs to the wholesaler.
- Additional costs to upgrade technology: Many wholesalers, especially rural ones, are not technology-savvy and will need to rely on help from their supplier companies to undergo a technological transformation. This means that supplier companies may need to increase commissions for wholesalers, an added cost to the company, or wholesalers and retailers themselves will need to invest in new systems, incurring additional expenses.
3. For Importers and Exporters
- Imports Taxation: Every import will be treated as an interstate supply, and will be subject to Integrated Goods and Services Tax (IGST) along with Basic Customs Duty (ranging between 5% and 40% depending on the good imported). This implies that IGST will be levied on any imported item, based on the value of the imported goods and any customs duty chargeable on the goods (say 10%). IGST is a combination of SGST (say 9%) and CGST (say 9%).
Thus, imports taxation is an added tax liability for retailers who import goods or services.
- Exports Taxation: Exports will be treated as zero-rated supply, i.e., no GST will be charged on exports. This is in line with the “Make in India” campaign that aims to make India a global manufacturing hub, for which exports are important.
- Import of Services: The new clause of import of services places the onus of tax payments on the service receiver when the services are provided by a person residing outside India. This mechanism is called reverse charge and will apply in certain scenarios. For example, if the assesse has no physical presence in the taxable area, then the representative of the assesse will be required to pay tax. In the absence of representation, the assesse has to appoint a representative who will be liable to pay GST. Another example is when a registered dealer is buying goods or services from an unregistered dealer. In this case, the registered dealer will have to pay the tax on supply.
- Need for restructuring working capital: A major shift is that GST is based on “transaction value” rather than MRP. In the old system, CVD was charged as a percentage of the MRP. Under GST, IGST will be charged as a percentage of the transaction value. This will affect the cash reserves of retailers and wholesalers, and they will need to reassess their working capital needs.
On the whole, GST is expected to bring domestic players at par with large multinational corporations due to the renewed import and export norms and the rules for FMCG suppliers. This is a good sign for Indian trade and exports in general, and thus the implementation of GST shows promise to propel India onto the international trade arena.
4. Impact on Traders
Positive Impact on Traders
1. No dispute good Versus Service:
In present regime of tax structure, the big issue is whether the transaction amount to sale of good or service. Though this dispute still may arise from view of time/place of supply from good or time/place of supply of services as both are separately given. However, net impact is neutral, on either of them needs to pay GST.
2. Composition levy Increased
In current regime of taxation the limit under Composition Scheme is 40 lakhs whereas under GST it is increased up to 50 Lakhs. It is beneficial as 10 lakhs in turnover is a big thing from trader point of view.
3. Credit of Excise Duty and Service tax:
In current regime of taxation then a trader is not eligible to take credit of input service as well as the Excise duty. However, in GST regime he will be eligible to take all credits and it will make positive impact on trader.
4. No Margin to Disclose
Currently a trader who wants to pass on the CENVAT Credit of excise duty needs to obtain dealer registration and have to disclose the margin. But now this is no more relevant as trader is eligible to take credit as well as no requirement of separate dealer registration.
5. No Reversal of Credit on goods sent for stock transfer
Currently as stock transfer is not liable to Vat as well as CST hence, credit pertains to goods sent to stock transfer needs to be reversed. However, in GST Regime stock transfer got made taxable, hence No reversal of credit is required.
6. Credit of CST
In current regime of tax, on inter- state purchases CST paid became the cost to the trader as the Credit was not available whereas under GST regime it will be available as IGST Credit.
Negative Impact on Traders
1. Stock transfer made taxable
In current regime of tax, stock transfer are not taxable on being made available “Form F” where as in current regime stock transfer made taxable. Due to this Warehouse decision to be taken more appropriately.
2. No Form “C”
In current regime of tax, on being made available the Form C, CST rates charged at the rate of 2% instead of 14.5% which is local tax rate, however in GST regime interstate will be taxed at standard rate i.e IGST.
3. Goods sent to job work are taxable
In current regime of tax, the goods sent for job work are not liable to CST on being made available of Form “H” whereas in Current GST regime it became taxable.
4. Increased burden of Compliances
Instead of 4/12 Returns (state wise vary), now a trader needs to file 37 returns in year and much more compliances.
5. Impact on Manufacturers
Positive Impact on Manufacturers
1. One Tax
In present structure of tax, there is various kind of taxes such as excise duty, Service tax, VAT, Entry tax, Central Sales Tax etc. But in GST regime there is only one tax i.e GST however, there will be three parts such CGST, SGST, IGST. This is measure relief for the manufacturer.
2. Rate of tax
In current tax regime the consumer pays approximately 25-26% more than the cost of production due to excise duty (at 12.5%) and value added tax (almost 14.5%).In GST, goods may become cheaper marginally which a good sign for manufacture to compete with international market. The Impact of rate of tax depends on industry wise, but mostly it is beneficial.
3. No Concept of Manufacture
In Non-GST regime the biggest litigation and issues are whether the transaction amount to manufacture or not. The interpretation related to term “Manufacture” will no more be relevant. It may result in ease of doing business without having litigation about the process.
4. Reduction In Cost
In GST regime there will be reduction in cost of production as credit will be eligible of tax on purchases made from interstate purchases and no cascading effect. Hence, a manufacturer need not take the decision regarding purchase from point of view of tax implication as credit is eligible on all purchases.
5. Minimization of Classification issues
In current regime of tax there are numerous issues on classification of goods due to separate rates on different goods and exemptions on certain goods. But in regime of GST there shall be minimization of classification issues due to uniform rate and less expected exemptions.
6. Speedy Movement of Goods
In GST Regime of tax structure there will be minimization of trade barriers, such as filing of way bills/entry permits. Compliance under entry tax will be abolished. There is much compliance in current regime on interstate movements or locally such as way bills, statutory forms etc which lead to slow movements of goods whereas this concept is going to be abolished though check points will still be eligible.
7. CENVAT Credit
In regime of present tax, the manufacturer is unable to utilize the credit of Central Sales tax and VAT provided output is charged under Composition Scheme, which becomes the cost for him. But in Regime of GST, a manufacturer will be eligible to take Credit of SGST (VAT) as well as IGST (CST) on the purchases. There will be seamless flow of Credit in GST.
8. Valuation of Samples
In current law goods removed on sample basis, tax needs to pay by adopting the nearest aggregate value. However, in GST regime, time up to six months is granted to decide whether the good sold on sample basis has been approved or not which beneficial thing for manufacturer. However, after 6 months tax needs to be paid if the same is still in process of approval.
9. State Wise Registration
Generally it has been observed that many manufacturers have two premises of factory within same locality or in same state and they are liable to take separate registration for each factory. But in GST Regime, registration has to be taken state wise and not factory wise. This will abolish the difficulties which have been faced due to separate registration.
10. No assessment by multiple tax authorities
Generally, manufacturers are facing many difficulties in handling the assessments done by the Separate authorities for VAT, Service Tax, Central Excise, CST, etc. In GST regime it is expected that assessment will be done by State authorities for SGST, Central Authorities for CGST, and Interstate authorities for IGST.
11. Electronic Mode for Forms
In current regime of tax there is very much manual filing of documents such as initial declaration, Numbering of Invoices etc. But in GST regime there will be less manual filing of documents and more through electronic mode. Further, the communication with department also could be through electronic mode.
Negative Impact on Manufacturers
1. Time of Supply
In current regime of tax the time of duty on manufacture attracts at the time of removal where as in GST regime it will earliest of the four such as (Date of Issue of Invoice, Date of Payment, Date of Removal, Debit in the books of Receiver).
2. Increase in Working Capital
In GST regime of tax, stock transfer has been made taxable, which requires the huge working capital because the realization of tax going to be on final supply tills that It may block the capital.
3. No Credit of Petroleum Product
Petroleum Product has been kept out of GST hence; the tax paid on Petroleum Product is not eligible as credit and same became the cost. Each industry requires the Petroleum Product such as Fertilizer Industry, Power Sector, and Logistic Sector etc.
4. Introduction of Reverse Charge on Goods
In current regime of tax structure there was reverse charge on specified services but in case of GST even the reverse charge will be applicable on goods.
5. Post supply Discount
If the discount has to be given post supply than it must be known to both the parties at the time of supply or pre-supply and the proof of being known is the clause of discount must be there either in contract or agreement or offer etc.
6. Matching Concept of Returns
In current regime, if the tax has been made the purchaser to supplier then he is eligible to take the Credit it is immaterial whether the same has been credited to Central Government by the supplier or not. But in GST Regime, the matching concept if tax credit will be there, if credits pertaining to supplier does not match with purchaser than it will not be accepted in return unless it is rectified by both the parties.
7. Denial of CENVAT Credit on purchases made from unorganized/unregistered Person
In GST regime if the goods have been purchased from the register person then only credit will be given otherwise the credit will not be allowed.
8. No Compliance of “C” and “F” Forms
As stock transfer has been made taxable in GST Regime hence Concept of “F” Forms is no more relevant and IGST has been levied on all inter-state purchases or sale and credit will be allowed, hence No Concept of form “F” is relevant.
9. Increase in Compliance-burden
There is going to be huge compliance burden in GST Regime such as 37 returns for one office in a year.
a Point of Caution
In the GST regime, compliance in general and Input Tax Credit in particular will be dependent on invoice level information – as invoice matching will be the key to avail the correct Input Tax Credit. One of the genuine concerns hitting the trader under GST, will be the scenario of non-payment of tax by his supplier. As per the GST law, a recipient will get his due ITC, only if his supplier has uploaded all the correct sales invoices, which is matched and acknowledged by the recipient; and, any missing purchase invoices uploaded by the recipient are also similarly matched and acknowledged by the supplier. In short, if a supplier chooses to default, this will lead to loss of Input Tax Credit for the trader. Ideally, this will lead to ‘compliant’ traders not dealing with ‘non-complaint’ ones – but at the cost of a one-time loss of tax credit. However, traders can potentially avoid such scenarios, by effective vendor management in advance – identifying vendors who will be compliant, and keeping a watch out for credit rating before doing business with any entity.
In the current regime, stock transfers are not taxable – provided Form F is furnished, VAT is not charged. However, input VAT credit is reversed at a certain percentage (4% in most states), and the rest is available as credit to the trader. In the GST regime, stock transfer will become a taxable event. While the tax paid will be available fully as credit and also, there will be no need for credit reversals – this will have an impact on the working capital. This is because, for the tax paid on the date of the stock transfer, the ITC is available only when the stock is liquidated by the receiving branch. Thus, in case the logistics planning is poor, leading to overstocking at branches, working capital will be blocked for a long time – a direct challenge for SMEs who operate with thin working capital. With the seamless availability of credit on inter-state purchase and effective removal of state business boundaries going forward, there could be a potential reduction in the number of branches / warehouses – as they would exist solely for operational reasons rather than for compliance. This could lead to reduction in stock transfers, which will of course nullify the impact of stock transfer on the working capital of a trader.
Compliance activity for a trader will seemingly go up under GST – 4 VAT returns per year (quarterly) in some states to 12 VAT returns per year (monthly) in some, will be replaced effectively by 37 returns per year (3 monthly and 1 annual) in the GST regime. However, if we analyze the current compliance activity – it is usually submission of monthly returns via forms, followed by submission of annexures with details of sales / purchase transactions to calculate the correct Input Tax Credit. Thus, the activity per say remains the same, even when GST comes in. However, the depth at which the activity will be done will be more under GST, as all transactions will need to be matched and filed accurately for the right compliance to happen, and the right Input Tax Credit to be availed. The complexity only increases if one has operations across states, since each state will require a separate registration. Service providers are bound to bear the brunt of this change as they shift from a centralized service tax regime to a decentralized supply of services under GST. Traders, will thus need to invest in the right GST software and technology to ensure that the work gets done accurately, yet timely – which of course, will entail additional costs.
a Point of Contention
For traders on e-commerce platforms, GST certainly brings cost reductions in the form of availability of input credit and the levy of a single tax on supplies across the nation. It is expected that it will be easier to do business in the GST regime with greater clarity on the treatment of e-commerce transactions and uniformity in the taxes levied. However, traders must also be prepared for the impact on their cash flows – due to tax collection at source (TCS) by e-commerce operators, non-compliance by their vendors and payment of taxes on a monthly basis. Most importantly, compliance activities will also increase for e-commerce traders in the GST regime due to mandatory registration; in short, they cannot opt for composition levy even if their aggregate turnover is less than INR 75 Lakhs. Awareness of the compliance requirements under GST, proper training of resources to handle these requirements and use of technology to make all this easier will ensure that e-commerce traders can capitalize on the new era of e-commerce in India.
Under VAT, on purchases made from unregistered dealers, the recipient (registered dealer) of goods has to pay a tax called Purchase Tax. Under GST, the same concept has been retained by the Government under the name of Reverse Charge – primarily to ensure, that the tax is collected on the sale of goods or supply of services from various unorganized sectors. Under this, the liability to pay tax rests with the recipient. This is applicable on specific supply of goods and services, specified by the Government. However, a person liable to pay taxes under reverse charge mechanism will require mandatory registration.
In the GST regime – while, there will be a minimization of trade barriers as the corresponding taxes would have been subsumed under GST, the implementation of the same will be easier said than done. Under GST, a registered person who intends to initiate a movement of goods of value exceeding INR 50,000 will need to generate an e-Way bill. While the intent is to unify the Indian market and assist smooth flow of goods, the entire process is cumbersome. It requires participation by the supplier, the transporter and even the recipient – who has to communicate his acceptance or rejection of the consignment covered by the e-way bill within a short span. Thus, there is a fair chance that whatever savings are generated by virtue of reduced inventory costs, may get evaporated while covering compliance and associated technology implementation costs. However, once the initial barriers have been crossed and with greater adoption of technology, the current logistical complications are expected to reduce over a period of time. As such, the government has decided to stall the implementation of e-way bill, till the systems are ready, as per the recent notifications.
The introduction of the Goods and Services Tax will be a very noteworthy step in the field of indirect tax reforms in India. By merging a large number of Central and State taxes into a single tax, GST is expected to significantly ease double taxation and make taxation overall easy for the industries. For the end customer, the most beneficial will be in terms of reduction in the overall tax burden on goods and services. Introduction of GST will also make Indian products competitive in the domestic and international markets. . However, technology will surely be a game-changer in this regard, as this will be the only way the compliance burden of GST can be effectively absorbed, translating into more business benefits for the Indian trader. Last but not least, the GST, because of its transparent character, will be easier to administer. Once implemented, the proposed taxation system holds great promise in terms of sustaining growth for the Indian economy.