Impact of GST on retail should be examined     

Modern trade or organised retailing is emerging as an accepted and preferred model for doing business in India as they offer increased product choice - all under one roof, enhanced shopping experience as well as value for money. Introduction of Goods and Services Tax (GST) in India is a certainty and its impact on the retail sector is equally crucial to examine. It is believed that traders, including retailers, would be one of the biggest beneficiaries of this harmonised system of taxation. Although retail sector has succeeded in evolving as an organised revenue generating sector, it still continues to be fraught with some inherent challenges posed by the current indirect tax regime.

CENVAT credit of input taxes—Inability to offset the input excise duty (on procurement of goods) and service tax (on procurement of services viz rentals, freight, advertisement, other business related services) against the output tax (possible only value added tax), leads to cascading of taxes. Given that the output VAT can be (currently) discharged only through utilising the input VAT, the input service tax (largely on account of rentals) becomes a cost in the system. The ability to pass on this additional cost to the final consumers depends on market dynamics and therefore, may lead to reduction in margins. This issue of inability to offset the input taxes should get resolved once GST is introduced in India. This is for the reason that under GST, in the form in which it is currently contemplated, taxes on services would be available for set off against taxes on goods, (albeit cross credit between Central GST and State GST is not envisaged).

Even in case of retailers involved in provision of services, the quantum of input service tax credit (under the CENVAT credit regulations) available is unclear, since the regulation recognizes only manufactures and service providers (and not traders!). It is expected that GST would remove this anomaly since the taxable event for levy of GST would shift to 'sale of goods' from the current 'manufacture of goods', resulting in re-design of input credit regulations to include any buy-sell arrangement.

Lack of uniformity in State VAT laws - Another challenge currently faced by retail stores pertains to State VAT laws. The lack of uniformity in these laws with respect to rates of taxes, threshold limits, compliance requirements, etc lead to unnecessary compliance burden on the retailers. The levy of entry tax without the ability to offset against output VAT adds to the tax burden. It is expected that introduction of GST would address these issues since the 'First Discussion Paper on Goods and Services Tax in India' released on November 10, 2009 has, inter alia, proposed that the basis of classification would be uniform across all States (as far as practicable) and that all taxes and levies that are on supply of goods / services should be subsumed in GST.

Supply chain strategy—Warehousing/ logistics/ distribution are some other key areas that would be directly impacted on introduction of GST. Given the fragmented VAT model and the complexities revolving around issuance of declaration forms/ different tax rates/ state-level compliances, inventory and distribution decisions are based on tax efficiency rather than operational efficiencies. It is currently observed that most companies prefer to maintain decentralised warehouses across states to avoid sunk cost of central sales tax, which leads to high operational costs. Movement of input credits across state borders under the GST regime (through IGST or any other equivalent model) would facilitate investment decisions being made purely on economic concerns, independent of tax considerations.

Credit of duties paid on imports - Further, a significant boost under GST for trader-importers would be availability of countervailing duty of customs (CVD) and additional customs duty (ACD) as input credit. Currently, CVD is a cost for the trader-importer whereas ACD is available only through refund mechanism. Going forward, CVD and ACD, if subsumed under GST, would be available as credit in the value chain. This would result in savings in cost leading to enhanced margins or reduction in ultimate selling price of goods.

To summarise, introduction of GST would benefit the retail trade in India to a great extent in the form of release of blocked input taxes, ability to take business decisions based on commercial considerations, rationalisation of prices and reduction of state level compliances. Overall, the organised retail sector will be impacted (positively) with the proposed introduction of GST and the players should be mindful and prepared to reap the benefits.