Many small retailers and wholesalers are worried and restricting the quantity of products they buy from consumer goods companies, fearing that they may incur a loss when the country moves to goods and services tax (GST).

 

The worry is that from July 1, GST would apply on the goods they sell, even if they had bought those before that date and already paid value-added tax, excise duty and other levies.

 

While the government said that the seller would get a 40% deemed credit on the Central GST paid, experts said there could still be some loss. Also, CGST is just half the total GST, with the rest here being states’ share -so the credit may not fully offset the taxes already paid.

 

Many distributors and retailers are reluctant to buy products that they think they would not be able to sell before July 1 when GST comes in. This is mainly due to the 40% deemed credit and the loss that can happen to retailers and distributors due to the differential rates and (ambiguity on) who shall bear that.

 

The new mantra for the retailers and wholesalers of consumer goods and automotive sectors seem to be `buy what you can sell till July 1′. The question is what would happen to goods which are lying with the retailers on July 1. In most cases, these products are subjected to a maximum retail price.The retailer will have to sell the products on the basis of the MRP -the Legal Metrology Act does not permit any alterations to that price -but pay an additional GST. He could face a loss if the rates under GST are higher than the existing rates.

 

 

So, if a shopkeeper has a TV set in his showroom which was bought in May and on which taxes were already paid, when GST kicks in on July 1, he would be required to also collect GST on the product without altering its MRP. If the tax rate under GST on TV sets is higher than that under the current system, the difference would be referred for deemed credit. But since deemed credit is only available on 40% of CGST there could be some losses.Exactly the opposite could happen if tax rates on TV sets are less under GST. But traders aren’t willing to gamble on that.

 

 

There is also a view that the deemed credit of 40% CGST would be applicable when the seller can’t produce bills of the various levies, such as the excise duty paid by the manufacturer, that reflected in the MRP . In such cases, he may have to absorb the remaining tax cost, though those who provide the documents would get full credit.

 

This makes it essential to focus on supply chain planning from now so that stock optimisation strategies at various distribution channels are planned and executed well in advance.

 

 

“The problem is that many retailers are worried. First, they are not sure about the rates and, secondly , they are not even well informed about GST,“ said Praveen Khandelwal, secretary-general, the Confederation of All India Traders. “Some retailers do not want to fall in the trap where they end up making losses although I think the government should come out more clearly and say that there would be no loss and there would be 100% tax credits on such tax losses.“ While different products would have different rates, some retailers and wholesalers fear that there could be a loss of 3.5% to 9% on taxes alone.

 

Some of the retailers have already stopped dishing out discount schemes fearing this. ET had on April 10 reported that some of the biggest FMCG companies, including Hindustan Unilever and Procter & Gamble, have altered their manufacturing strategies with a hope of benefiting from GST. These companies have also changed prices of some of their products.

 

J Suresh, chief executive at Arvind Lifestyle Brands, which sells international brands including Gap and Arrow, said the company isn’t doing anything right now over GST. “First of all we don’t know the rates yet. Second, the procedure is not known. Whatever action we may take now, that action has only 50% chance. So, we will not do anything,“ he said.