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A primer for retailers in doing business once GST comes into effect
October, 13th 2016

A look at the various changes retailers will have to undergo once GST is implemented

If all goes according to the government’s plan, the goods and service tax (GST) will be enforced from 1 April 2017. The bill has already been ratified by half the state governments. President Pranab Mukherjee also gave his nod early last month.

Retailers are largely slated to benefit from it but what kind of immediate or near-term impact will it have on the way they do business?

Here’s a look at the various changes retailers will have to undergo once GST is implemented, based on a presentation by tax review firm Dhruva Advisors LLP at the Chennai Retail Summit held last Friday.

Operational changes:

—Procurement of goods and stock transfer

Under GST, retailers will have the flexibility of deciding whether to procure centrally or not based on what works best for them, rather than what costs less in terms of tax.

For instance, in the current scenario, if the company procures goods in Bengaluru and sends it around 40km away to Hosur, then it will incur higher taxes.

On the other hand, procuring goods from Chennai in Tamil Nadu will end up costing the company less by way of tax but increases the logistical burden of transporting goods over 300km when it could have been done in 40km.

“This kind of (thing) will go away under GST. You will have the freedom of doing business in the way you feel is most efficient for you,” Srinath S., associate partner at Dhruva Advisors, said in an interview.

—Longer procurement ‘lead time’

Companies that have good delivery networks might consolidate warehouses in the future once GST is implemented, Srinath added. If that happens, then retailers will need to plan for longer procurement ‘lead time’, or the time it takes between them placing orders for goods and the goods joining their supply chains.

—No room for freebies under GST

Instead of coming up with ‘buy one, get one free’ offers, companies may have to offer the second item at a discounted price. The item may be free for the consumer but the retailer will still have to pay GST on it under the current draft version of the law. “In the GST scenario, free is an allergic word,” said Srinath.

—Input tax credit

Companies will be able adjust their input GST taxes versus their output GST taxes. Under the current system, the input tax becomes a cost to retailers rather than a credit because it is not set off against output taxes.

—Sales returns

For business to business operators, taxes that retailers have already paid on a good or item that is returned can be adjusted on other items. That will continue under GST too. But for business to consumer retailers, it will become a cost under GST because they cannot adjust or set it off it against other items.

—No more entry taxes, for both online and offline retailers

For instance, if a Flipkart or an Amazon is sending goods from Mumbai, they will have to pay central sales tax in Mumbai. If the company’s goods have to be shipped to Madhya Pradesh, it will have to pay entry tax in Madhya Pradesh too but those restrictions will go away with GST.

IT system and compliance changes:

—IT systems of retailers will need to undergo considerable changes under GST. A lot more information will also need to be collected when it comes to maintaining and filing taxes. Tax data will need to be collected under three different GSTs—the central GST, the state GST and integrated GST (inter-state GST). If retailers continue to give out freebies, they will need to change their technology to capture those separately too.

—Systems will also need to have up-to-date information on each vendor that a retailer works with. For instance, if a retailer’s vendor has not paid taxes, then the onus falls on the retailer. “That means you need to deal either with really ethical vendors, or handle it (differently) for instance telling a vendor that I will not pay you until you pay the government taxes,” said Srinath.

—Compliance will also increase substantially because retailers will have to file returns in every single state they operate in versus just once with the Centre.

Still, overall GST will prove to be good for retailers because they will be entitled to input tax credits which offsets all other administrative changes that they need to make, said Srinath. “Money wise they stand to gain, administration and compliance wise they will need to put in a lot more efforts so that’s the minus,” he added.

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