GST Impact on Wholesale Market

Impact

Details

• Most wholesalers make transactions in bulk and pay cash upfront as a consideration – from both manufacturers and distributors – albeit, with a difference in their tax liability towards each of these market participants.
• It is difficult for wholesalers to pass on the excise tax liability to the subsequent buyer in the supply chain as most of them do not possess excise registration themselves – therefore, they are unable to avail of any tax credit.
• The primary activity of a wholesaler is to buy and sell products – however, under the current indirect tax regime, they are also burdened with the requirements of maintaining invoices, being compliant with several tax laws, etc. – leading them astray from their primary course of work. Additionally, wholesalers find it difficult to maintain compliance constantly because of complex transactions and tax structures and owing to non-registration, they are not under scrutiny. Thus their tax liability is reduced significantly and they are able to undercut the prices prevalent in the market thereby generating higher sales.
• Under the GST regime, however, all invoices are required to mandatorily upload against the registered GSTN portal and the invoice must also be simultaneously accepted by a buyer. Further, since all the taxes have been subsumed into a common unified tax, the tax credit has become more seamless and smooth across the supply chain, notwithstanding the buyer or the seller involved with the wholesaler.
• An advantage is that multiple registrations have been struck out and thus wholesalers can be compliant with ease. The idea of tax evasion has been cordoned off completely, however despite this, there still may be several wholesalers who try to evade the compliance route – nonetheless, since there is a system of checks and balances under the GST and buyers and sellers have to confirm sales and purchases, non-compliance will be unlikely in the long run.
• Wholesalers will ultimately be forced to be GST compliant in order to maintain and sustain their business relations with the other players in the supply chain.

• The entire wholesale market is dependent on very low margins. Especially in the wake of demonetization, the entire wholesale market reverted to de-stocking its inventory in order to get higher liquidity because of the cash crunch that hit the nation.
• Big names in the fast-moving consumer goods sector such as Dabur and Tata fear that the same situation will arise once again with the GST coming into effect especially because of the fear that retailers have instilled within themselves regarding availing of the input tax credit on the existing stock of goods.
• To give a clearer picture, retailers are registered under their respective state VAT laws under the current indirect tax regime and are required to make VAT payments on the stock held by them as of the date of transition. It is pertinent to note that even though the VAT has been allowed as input credit under the GST regime, there are certain conditions imposed by the government on availing any input tax credit on closing stock – which means that some retailers may be left out.
• 100% input tax credit shall be available on goods on which the excise duty has been paid and there are invoices to ascertain the same – in case the invoices are not available then only 40% of the input tax credit may be availed.
• Tax on excise is applicable only to the wholesalers and distributors – to the retailers, such excise is passed as an additional cost and due to this reason, retailers are usually unable to claim the entire amount of credit, owing to an absence of information on the invoices.
• Pursuant to the GST regime, this cost shall be borne by the consumer, amounting to less competitive prices to other players thereby triggering the destocking of inventory by the retailers across the nation (during the transition to the GST phase) and then restock their inventory post the transition has settled.
• This means that for the transition period, wholesaler demand may die down which would amount to wholesalers undergoing the destocking exercise as well.
• Finally, because of such restocking, the ultimate demand for goods is expected to be on the rise.

• Wholesalers, especially those linked to the provision of fast-moving consumer goods and durable goods, have become wary of wholesale business as the GST date moves closer. The managing director of HUL, Mr. Sanjiv Mehta was recently noted saying that the entire wholesale sector in India would take some time to stabilize post the GST transition, leading to a downturn in the sector when compared to direct distribution channels.
• But obviously, the GST regime is expected to cause disruption in the wholesale sector such as bulk transitions, sale for cash consideration, lack of giving credit, maintenance of liquidity, operating on wafer-thin margins, etc.
• More wholesalers shall become part of the tax bracket, increasing both cost and effort. The principal manufacturers shall become extremely important as their role would include servicing the retailers in urban as well as rural areas.
• Manufacturers will have to further provide incentives in the form of lower costs and increased commissions to wholesalers – nonetheless, the burden on the direct distribution channel is expected to be lesser as distributors would have entered into agreements with manufacturers for becoming GST compliant, investing in technology and fixed assets.
• The wholesale sector thus is envisaged to becoming more expensive as opposed to direct distribution. It is also pertinent to note that manufacturers in the fast-moving consumer goods and durable goods sector shall begin to extend direct reach in an effort to become more cost-effective.
• The GST regime could lead to an increase in outlets directly owned by the company and an increase in distribution channels – leading to positive news for organized wholesale participants in the market, e-commerce outlets, and cash & carry models of business that shall easily take over and crush the unorganized sector.

• Most supply chain models are made keeping tax liabilities in mind as a multiplicity of taxes can lead to greater costs especially when it comes to transactions taking place interstate. This causes wholesalers to enter into business agreements with manufacturers and retailers on an intrastate basis and limits them from reaching outside the state or growing their business.
• Under the GST regime, a more positive boost to wholesalers is expected as firstly the multiplicity of taxes will be struck down. This will lead to the entire nation becoming the marketplace. Further, input tax credit availability will allow manufacturers to become more competitive both intrastate and interstate.
• Manufacturers shall have wider room for access when it comes to reaching out to distributors and wholesalers across the country thereby leading to an expansion in the business portfolio. This helps in the generation of sales from both the existing retailers as well as serving a higher number of retailers within the same state.