How Indian traders can reap benefits from GST

Traders and vendors negotiate prices of tomatoes at a wholesale market in Hyderabad. Distributors and dealers have stopped fresh purchases and are focused on offloading old stock.

Trading has been the primary business activity in India since time immemorial. Even the British set up a trading post through the East India Company. While India has advanced in technology and has seen rapid industrialisation along with growth in the manufacturing sector, it is the trading sector that serves as the conduit pipe for making the products available to the consumer. The supply chain for many commodities is long, covering wholesalers, distributors, dealers and retailers after the manufacturer.

State taxes
When a distributor or a reseller (dealer) sells goods within a state in India, the said trader has to pay value added tax (VAT) to the state government. In case the dealer sells the goods from state A to state B, he is required to pay central sales tax (CST) to the originating state government. No indirect tax is payable on such sale to the central government. All this will change in GST.

GST on dealers
Every wholesaler or distributor or dealer or retailer or even a small shop will have to pay a Central GST (CGST) to the central government and a state GST (SGST) to the state government on all supplies made within the state. This would mean that a vast majority of the trading community would enter the central government tax levy in addition to the state government tax levy. Assuming, the GST rate is 18 per cent, it is likely that the CGST would be nine per cent and the SGST would be nine per cent. The benefits to the country would be multifold and are given below:

(i) Every dealer would be registered based on a Permanent Account Number (PAN) which is the identification number that is given under the Income Tax Law. This would mean that direct tax evasion would be checked to a large extent.

(ii) As the existing system of the Central Indirect Tax is only on the manufacturer, it is not perceived as an equitable levy since the entire chain is not taxed. GST would bring in an equitable tax system since every person in the supply chain would be taxed with corresponding input tax credits.

(iii) India is also implementing a complex tax credit system which is system-driven and technology-based. In other words, a dealer in the supply chain would get the credit of the tax paid earlier by the vendor only if the vendor complies with the law. This would usher in self-policing among businesses.

Benefits for dealers
The trading community can reap benefits provided that the compliance level is high, and the vendors, contractors, service providers engaged by the dealer are also highly compliant. For example, if there is a high-end outlet selling perfumes, watches and hand bags, given the current consumer environment, the outlet has to be in a location which attracts maximum footfall. This would mean high rents and these rentals have an element of service tax charged by the landlord and paid to the central government. The dealer in the existing law cannot take a tax credit since he pays only VAT to the state.

In the GST regime, the dealer would be able to take the GST charged by the landlord and set it off against the GST payable on the supply of products.  Similarly, such high-end outlets would require insurance, maintenance, consultancy, advertisement, security, security appliances, manpower supply services, etc. Currently, all these are with central indirect taxes and hence form part of costs. Going forward, since all these procurements would attract GST and tax credit would be available, the tax would be eliminated from the cost. The tax credit would be available to pay the GST on supply of the goods.

Transition woes
The entire trading community is a worried lot. While they understand the impact of GST and the benefits in the future, their biggest worry is the stock in hand. Distributors have stopped purchasing from manufacturers in the past few weeks since whatever is procured now would be with excise duty and when the same commodity is sold, it would attract CGST payable to the centre, resulting in double taxation.

While the GST law provides for transition stock benefit and seeks to convert this excise duty into GST credit, the technical and procedural requirements are worrisome. Further, many distributors have old stock and the transition is confined to one year stock. Distributors and dealers have, therefore, stopped fresh purchases and are focused on offloading old stock. In the consumer durables segment, it is virtually festival season with massive discounts being offered.

Impact on small dealers
GST could impact small dealers significantly. While there is a simple scheme of composition inviting a flat payment of tax without any credits, the scheme is confined to a trader having turnover up to Rs5 million. If a trader or a shop or a department store has a turnover of Rs7.5 million, while the profits may not be significant, the compliance requirements are very high. The outlets have to invest in new systems, new billing software, understand the multiple GST rates for commodities, file information online 37 times a year, maintain records, capture massive information in the bills, etc. While this is part and parcel of a technology-based compliance mechanism linked with prevention of leakages of revenue, it is likely to throw a very big challenge to small and medium size dealers.

Changes in supply chain
GST is a game changer and is perceived as a business reform in addition to being a tax reform. Procurement patterns would change and the supply chain would also get altered. To illustrate, a manufacturer in state A may have a dealer in state B. In order to cater to this dealer market with tax credits under the existing law, the manufacturer would have appointed a C&F agent in state B or would have opened a depot in state B. The goods would have been sold by the C&F or the depot to the dealer. When GST is introduced, manufacturers are likely to review their supply chain and some of them would no longer adopt the C&F or depot route and would prefer to directly supply from state A to the dealer in state B. This would automatically increase the compliance requirements of the dealer since the manufacturer would bring in controls and different verification protocols or credit limits.

Invoicing
In the current system while a dealer or a trader may have been carrying on business in accordance with law, the invoicing in many locations is either handwritten or simple with a basic description of the item and the rates. Harmonised system of nomenclature (HSN) would virtually be a new language for a trader and the trader will now have to know the HSN code applicable and specify the same in the invoices. The invoice will have to be in a prescribed format with fields of information. Further, information such as name and address of the recipient, address of delivery along with the state code is required to be captured if the recipient is unregistered and the value of the taxable supply is Rs50,000 or more.

GST rates
A dealer will have to understand the GST rate applicable for the commodities dealt with by him and correctly discharge the liability. This exercise is not simple as there are multiple rates linked with classification.

The writer is an advocate and tax consultant based in Chennai. Views expressed are his own and do not reflect the newspaper's policy.