Explain Anita Rastogi and Bhavesh

Transcription

1 Industry Report Change in the Offing The proposed Goods and Service Tax is an inflexion point in India s fiscal landscape, and marks a transition from the existing origin-based to a destination-based taxation regime By Juhi Sharma Explain Anita Rastogi and Bhavesh Gupta, Associate Directors - Indirect Tax, PwC, You go to your neighbourhood supermarket to buy food and groceries for your home. You select the required items, pay the amount which the cashier asks you, and come back home with the selected items. You must have noticed that apart from the cost of the items purchased, you also pay a tax called sales tax (now known as VAT, which is a tax on sale of goods and the rate varies from one state to another). Then you will wonder what all the fuss is about introduction of GST and how this will impact you as a buyer. The VAT charged by the retailer on goods sold goes in the kitty of the State Government. The proposed GST scheme will replace the VAT currently being charged on sale of goods. When the GST scheme gets implemented, the supply of goods will attract GST which would be divided into two components: Central GST (CGST) and State GST (SGST). CGST on supply of goods will go to Central Government, whereas SGST will go to the State Government. Under the current scheme, State VAT is levied on the value of the goods inclusive of excise duty. This leads to a situation of tax on tax which the final consumer has to bear. Under Thomas Varghese, ABRL the proposed GST scheme, only the value added by wholesaler would be added to manufactured value of goods, which would remove the cascading effect of tax on tax. Purpose and intent The intent of putting GST into practice was to establish an economically efficient tax system that is neutral in its application and to remove the present problem of tax cascading prevalent in the existing system. Comments Sunil Sanklecha, Managing Partner, Nuts n Spices, The implementation of GST will bring along only benefits for the retailer and consumers. The biggest advantage for the retail industry will be the input tax credit system that will come into force once GST is in place. Says Thomas Varghese, Former CEO, ABRL, At an overall level, GST implementation is expected to simplify the supply chain for consumer goods, make cash flow improvements by removing the excise duty on goods manufacturing, and enable enhanced profitability due to the elimination of tax cascading. He adds, The benefit to the end-consumer can lie with reduced tax on goods and services. This may have an impact on the sales by the retail industry and manufacturing organisation. The favourable or adverse impact on GST shall be determined by the end cost of goods and services that the company will pay viz-a-viz the cost incurred currently. The current proposed rates are favourable and the costs will get reduced. Varghese explains that the current Indirect Tax structure levies around 30 percent of the tax burden on an individual commodity until it reaches the final customer. For retailers, it is a cost which in turn is passed on to the final customer. By implementing the GST, the proposed tax rate is 16 percent (8% SGST + 8% CGST). So there is a reduction of approx 14 percent in the total tax rate. Moreover, in the current scenario there is no provision for set-off for Central Taxes (excise, service tax, customs, etc) as against State Taxes (sales tax, entry tax, etc) which further increases the cost. However, in the GST regime, retailers can avail full set-off for SGST and CGST, which will further reduce the cost to the end consumer. Current concerns As regards retailer concerns, Mark Ashman, CEO, Hypercity Retail, says, Various taxes like VAT, CST, Service Tax, Excise Duty, CVD, Entry Tax, etc, administered by various government and local authorities are the problems faced by retailers in the existing tax structure. No Cenvat Credit is available to the retail industry on the purchase of services which are exclusively used for trading activities. It is a cost to the retail industry as various forms, formalities, and taxes are involved in the movement of goods from one state to another, and also within a state. Mark Ashman, Hypercity Retail Observes Chitra Shinde, Chief Operating Officer, Gati, The problems faced by logistics companies in the existing tax structure are mostly due to various forms and clearance 34 PROGRESSIVE GROCER July 2012 AHEAD OF WHAT S NEXT

2 GST is seen as the single most important tax reform initiative in India since Independence. It is expected to provide a significant boost to investment and growth of the economy Ernst & Young formalities and check-posts at State borders. The need for CFA reduces the ability currently to market good 3PL services in warehouse management. Industries prefer the low cost operation, leaving large amount of warehouse capacity lying under-utilised. Says Varghese, The current tax system prevalent in India encourages sourcing within states as much as possible for retail sale. It also encourages locating the distribution centers in the state of sale if the procurement is from outside the state. Apart from this, retailers have to ensure multiple tax compliances. Liasioning is needed with multiple departments leading to staff and system overheads for the compliances. Also, the working capital is affected by accumulation of credit in inventory (though there is no clarity even in GST). Elimination of tax cascading is expected to lower business input costs and improve profitability. It will require adjustments to be made to margins for retailers which can eventually be passed on to the end customers. Transitional challenges It is held that GST will have a significant impact on almost all aspects of businesses operating in the country, including the supply chain, sourcing and distribution decisions, inventory costs and cash flows, pricing policy, accounting and IT systems, and transaction management. In order to make way for GST, companies need to understand its full implications, make and test the system changes, and prepare a roadmap for a smooth transition. Enumerating on some key challenges the businesses will face while undergoing the transition, Varghese points out the need for clarity on the concept and compliance procedure, administrative support from department, availability of trained resources for the compliances, treatment of accumulated set off under various acts (VAT, excise etc), IT changes (need to change current ERP to accommodate new tax compliance), and time windows for adoption to be provided by the government. The transition from current tax regime will be very difficult considering the volume of business and availability of trained resources. According to us, the supply chain shall undergo a sea change post GST. A recent study on impact of GST on transportation and logistics industry has pointed out that the new scenario could involve lesser number of warehouses, but with larger sizes. The current problem of loss of credit on inter-state purchases and stock transfer will be considerably reduced, he elaborates. Says Shinde, As regards transitional challenges for logistics companies, one impact could be from being able to provide strong secondary distribution. If post GST, the states apply the same former model of checkpost and entry and octroi taxes, it will not deliver the advantages expected. Transportationrelated GST is likely to be collected at origin and paid to destination. Any logistics operator will need to have a registered SGST entity in any state where GST attributable activity may occur, including intermediate locations where servicing or parts may be consumed. This will have a negative impact on the ability to manage GST input credits. Chitra Shinde, Gati Shinde adds, Of greater concern will be a potential rush of logistics customers expecting overnight cost reductions where the infrastructure (modern trucks and warehouses) are not available and where the organisation has not yet done the work to redefine the role of inventory in the supply chain. A significant amount of pain will need to be endured by both sides as the parties come Pawan Jain, Safexpress to terms with potential increases in warehouse and transportation costs that support lower levels of inventory - all in all, delivering a reduction in total logistics costs. Adds Pawan Jain, Chairman and Managing Director, Safexpress, Companies have to form internal teams to understand how GST will affect their bottom line, working capital, supply chain, manufacturing, long-term contracts, and new investments. GST has to be seen as a business issue and not just a tax issue. The preparedness for GST needs to be discussed even at the board level. Says Ashman, Retailers should develop IT systems to incorporate all the changes of GST in a short period of time. They should provide training to all the employees of different departments on GST, for example, marketing, accounts, finance, etc. Unfortunately, there is no clarity on treatment of carried forward tax credit under Cenvat and State VAT as on date of commencement of GST. GST is also silent about the statutory declaration forms like C and F forms, way bills, road permits, etc, and whether these statutory declaration forms will remain or they will be abolished. However, Sanklecha adds on a positive note, We have been discussing and analysing the implementation of GST in the country for last three to four years now, so I think IT solution providers have got sufficient time to develop software(s) that will enable retailers upgrade their systems as per the new reforms post GST roll out. Therefore, technology transition is not going to be a serious AHEAD OF WHAT S NEXT July 2012 PROGRESSIVE GROCER 35

3 Industry Report GST is likely to be a big boon for the retail sector since it will allow the retailers to make use of a seamless credit on all input taxes, and pass on the benefit of these tax savings to consumers PwC challenge for retailers and I feel a retailer will take maximum 30 days for technology upgradation. The positives According to the PwC report, GST is likely to be a big boon for the retail sector since it will allow retailers to make use of a seamless credit on all input taxes and pass on the benefit of these tax savings to consumers. It will be a win-win situation for both retailers and consumers. Says Varghese, Whether all retailers will gain equally or some will gain more or less will again depend upon the nature of GST implementation, and the state of growth the retailer is in. Of course, for a bigger player, the gain in efficiency will be higher, but at the same time, the cost of compliance and change management will also be higher. I guess the benefits will depend on the strategic choices which different retailers will make, though the overall retail industry will definitely be benefited. Comments Raj Jain, Managing Director and CEO, Bharti Walmart, Implementing a simplified tax structure like GST will allow for free flow of goods across the country, significantly reduce operational costs across the supply chain, and minimise inefficiencies and wastage. As it will eliminate the cascading impact of multiple taxes, the end-consumer Raj Jain, Bharti Walmart will get a wide selection of quality goods at lower prices. Currently, the government is proposing 20 percent rate in GST in the first year, and then reducing it to 16 percent in the third year. Ideally, the rate should be 16 percent from year one, so that there is no major impact on the price of products. According to Ashman, the major benefit will be the reduction in administrative hassle on account of multiple taxes. We foresee a small benefit in cost of operations, as major component of service tax paid on input services is currently not available for set-off for retailers. This will change post GST. We do not foresee major impact on the price of products. As currently, the prices of products include excise duty/import duty + VAT/CST which comes to approximately 16 percent. In GST, the tax rate on the products will range from 12 to 20 percent with an average of 16 percent only. However, the impact may vary depending on the class of products. The PwC report points out that GST affords company s significant opportunities for realignment of procurement, manufacturing and distribution/sales patterns, and to engineer their supply chains on purely economic considerations as opposed to fiscal considerations. The time is, therefore, opportune for companies to gear up to face the challenges and also to seize the opportunities that the transition from the present tax system to the GST has provided. According to Shinde, supply chains will compete against supply chains more than the product itself. It will be key criteria to reach the end-consumer and drive down the costs. Only part of the benefits of GST will be realised at the outset because some state-based delays will remain. Ongoing commercial pressures will continue to drive the change over the following years as businesses look to improve service levels and compete to retain or grow market share. A fundamental shift towards managing inventory will be required to derive benefits post GST. This will be a catalyst to the adoption of broader supply chain management practices that will move the industry away from the current focus on lowest cost warehousing and transportation that limits progress today. Impact on supply and distribution The existing indirect tax regime has several characteristics which negatively impact supply chains. These range from irrecoverable taxes such as the CST, complex documentation of inter-state movement of goods, entry barriers at state borders resulting in long transportation times and imposition of local levies such as entry taxes and octroi upon physical entry of goods into designated areas. All of these add to the cost of doing business in India. GST moves away from origin-based taxation to a destination-based consumption tax. This means that all taxation will be based on where consumption of a good or a service takes place. Also, the taxable supplies under the GST will extend to all inter-state movement of goods, including on branch or consignment transfers not resulting in a sale of goods. This has major implications for supply chains of most companies. These changes pose challenges for companies as to how they might engineer their supply chains so as to be GST efficient. Shinde says, As regards GST s impact on the price of products, it will depend on the amount of GST charged. It will also depend on if the product is for final consumption or an input to another process where the GST credit can be claimed. Products should be less expensive where GST is able to replace existing cascading tax effects. Reductions in price are more likely where there are multiple levels of manufacturing/value-addition in the journey from raw materials to the consumer as the impact on cascading tax affects is greater. Where there is simple transformation, price increases may be more common, depending on the GST rate applied. She adds, As regards cost of operations, potential for reduction exists if the supply chain model is designed based on specific industry/vertical needs. Costs are likely to reduce more through efficiency in inventory management and better stock replenishments than the cost of movement of goods. Generally lower costs in distribution come from long hauling of goods. Shorter distances from mother warehouse to nearby consumption catchment areas have some fixed costs that may not result in reduction in distribution costs directly. Some scope exists in reduced back haul operations through better capacity utilisation in primary movement. 36 PROGRESSIVE GROCER July 2012 AHEAD OF WHAT S NEXT

4 Elaborating further, Shinde says, It is expected to reduce the number of warehouse locations and will also potentially increase larger volume of movement primary distribution to mother warehouses and faster secondary distribution enabling supply chains to be faster to end consumers. There could be cost increase as to gain full benefit sophisticated inventory management and pipeline visibility would be required. Regional distribution players with speed capability will stand to gain share of secondary movement. The jury is still out on the impact of GST on the Indian SCM sector. While the expectation is that it will simplify cross border (state) trade, it is also expected that the border check posts and other state-based taxes will remain. Where the distribution of GST revenues does not cover shortfalls in previous state-based revenue, the avenues may still open for individual states to look to recover the difference. This means that while the industry is standing by waiting for transformational change to occur through the implementation of GST, the states may act to negate any benefits from the outset. If the states can accept the allocation of GST revenues based on the expected origin/destination basis and reduce delays at border check posts, the much anticipated network rationalisation should occur, including the move to more centralised warehouses and the shift to larger capacity vehicles with the adoption of unit loads (pallets). Reduction in operational costs of supply chains According to the PwC report, one of the key challenges relating to the GST is with regard to supply chains. At present, the supply chains are impacted by several forces, some intrinsic to the organisation, some marketspecific, and some fiscal in nature. Fiscal considerations have historically been a key determinant of supply chain structuring in India with manufacturing bases and distribution networks engineered primarily to harness fiscal benefits. The availability of tax exemptions/benefits and the prevalence of differential taxes based on geographical locations have influenced the structuring of supply chains, procurement patterns, and distribution networks. The proposed GST will significantly impact supply chains from procurement through manufacturing to distribution. In essence, GST presents both challenges and opportunities in this regard. Under the current scheme, manufacturers/ sellers of goods maintain warehouses in various states. One of the reasons is that it becomes a tax-efficient model since stock transfers are not charged to VAT. However, in the GST scheme, every supply may become taxable and hence a truncated supply chain would be the mantra. So the concept of multiple warehouses may be done away with, thereby resulting in reduction in operational costs, says Rastogi and Gupta (PwC). The PwC report points out that it is probably fair to suggest that the longer the supply chain, the more the tax points in the GST scheme of things, and hence increased compliance Impact on F&G Retail Business Under the current scheme, the retailer is not allowed to take the credit of service tax paid on various services procured by him to enable him to sell the goods to the final consumer. The retailer maintains shop/store for which he procures various services such as security services, advertisement services, etc. Further, a major expenditure incurred by him is towards the rent paid for taking the shop/store on lease. The retailer can take credit of only the VAT paid on purchase of goods and set-off with VAT payable on goods sold by him. This reduces the margins of the retailer since he cannot pass on the burden of service tax paid to his customers (the law prohibits sale of goods at a price exceeding the MRP printed on the package). Although trading has been recognised as an exempted activity in the service tax legislation, service tax paid on services procured by retailer can be used as a set-off only if he is rendering some taxable services also along with the trading activity and that too on a proportionate basis depending upon the quantum of trading and taxable service. The proposed GST scheme is beneficial as it allows the retailer to claim a set-off of tax paid on input services as well as tax paid on purchase of goods with the CGST and SGST payable on supply of goods by him. This would mean a comprehensive input tax and service tax set-off which would result in a continuous chain of set-off from the original producer s point upto the retailer s level. Being able to take credit of tax paid on rentals would be a huge relief to the entire trading community. This would eliminate the burden of all cascading effects of taxes and lead to a reduction in final burden of tax on goods.in order to gain more market, the retailer would pass on the benefit of reduced burden of tax to his customer in the form of reduced prices of goods, incentives, free gifts and other marketing offers such as buy two get one free, etc. It would result in a win-win situation both for the retailer as well as the final consumer. For small retailers However, all retailers would not be impacted by the introduction of GST. Since the compliance and administrative cost involved in collecting the tax from small retailers would exceed the revenue collection from them, it has been proposed to keep small retailers out of the levy of GST if their turnover is less than the prescribed limit. Currently also, these retailers are exempted from payment of VAT on sale of goods if their turnover is within the threshold limit. The threshold limit varies from one state to another and generally varies between Rs 2 lakh and 10 lakh. Under the proposed GST scheme, small dealers (including service providers) and manufacturers are proposed to be exempted from purview of both CGST and SGST, if their annual turnover (excluding both CGST and SGST) of all goods and services does not exceed Rs 10 lakh. However, since this would lead to break in the credit chain for the customers of small retailers, small retailers have been given an option to obtain registration and pay tax so that the credit chain gets completed. Food and food grains Currently, essential items such as atta, maida, suji, and foodgrains like rice, wheat, pulses, etc, are either exempted or taxed at a lower rate by most states in India. We believe the trend will remain the same when the proposed GST scheme gets implemented. The Empowered Committee in the First Discussion Paper released on 10 November 2009 has proposed a two-rate structure a lower rate for necessary items and items of basic importance and a standard rate for goods in general. Anita Rastogi and Bhavesh Gupta, Associate Director- Indirect Tax, PwC AHEAD OF WHAT S NEXT July 2012 PROGRESSIVE GROCER 37

5 Industry Report I consider GST to be a most advanced economic reform that the country has ever seen. It is going to revolutionise the management of supply chains for the business Pawan Jain, Chairman and MD, Safexpress costs. The challenge and opportunity are to thus compress supply chains for GST efficiency while ensuring that the business objectives in and around supply chains are also met. Jain of Safexpress says, Taxes have often dictated a company s decision, as to where to manufacture and how to distribute its finished goods. This scenario will change in the GST regime. There will be a shift from multidistribution centres like to just 4-5, creating more efficient system of distribution and better controls on inventory. The impact on working capital could be significant as in GST regime the tax will have to be paid as soon as there is a stock transfer. But the company will be able to claim credit on the tax paid only when it finally sells the goods, which could take months. The company s money will be blocked in this period. There is going to be one significant advantage for retail business apart from saving on taxes and that is under GST regime, there will be no distinction among manufacturers, traders, and service providers. At present, traders don t get credit for anything other than state VAT. Kumar Rajagopalan, RAI Outlook at retailer-end Comments Kumar Rajagopalan, CEO, Retailers Association of India, GST, if implemented in India, can be a big game changer for the retail industry, as well as the supply chain industry in India. Currently, many retailers as well as key manufacturers and distributors plan a significant part of their distribution network from a taxation angle more than from pure logistics and transportation angle. This is to create shock absorbers for the cascading tax structures in the country - intra-state and intra-region. There are too many duplications across the supply chain including excise, entry tax, service tax on properties, service charges on transportation, besides other central and state sales tax. Sometimes, the nightmare is so immense that a retailer in Mumbai would get worried if he gets an order from a customer in West Bengal since the customer would be required to give all kinds of forms to accept the goods. He adds, In a recent dip stick about transportation, it was observed that better road infrastructure could bring down transportation time in the region of 30 to 50 percent but the number of stoppages on the road (thanks to various kinds of authorities stopping the vehicles transporting the merchandise) will still bring down the real gain by more than 50 percent. Implementing issues around GST are bound to be felt since some items may get costlier; thanks to rationalisation of tax tiers, some ambiguity about adjustment of input and output credit will surface and not all states may want to sign-off on the plan since the case of share of revenue between central vs. state vs. interstate will need resolution. Says Shinde, While both pan-india retailers and small stand-alone retailers stand to gain, pan-india retailers will gain through volume of business, which will enable economies of scale and increase both performance and productivity of the mother warehouse operations. Smaller retailers will stand to benefit through being able to use multi-user warehousing sites where the costs are much lower the independent stand-alone operations of lower scale. FMCG, consumer durables, automobile spare parts, technology, and e-commerce retailing of B to C distribution will get maximum benefit. The need for CFA will be replaced with need for high-end inventory management. As a consumption-based tax, the largest benefits will accrue to those products where exemptions can be applied or where cascading tax effects are replaced by the GST and input credits. E-commerce, notably B2C and C2C, is usually interesting as the enforcement of GST collection may cost more than the available tax collected. In many developed countries with GST, e-commerce trade is GST exempt. This sector could receive a boost of the same practice is adopted in India. Anticipating GST According to the National Council of Applied Economic Research, GST would further boost India s economy between 0.9 and 1.7 percent, over and above the national growth. The Finance Minister Pranab Mukherjee in his Union Budget speech announced that the GST will be operational by August Owing to lack of a political consensus, the roll out of GST has been delayed for several years now, and doubts have been raised by industry experts on its implementation by the new deadline as well. Sunil Sanklecha, Nuts n Spices Opines Sanklecha, I do not think that GST will be implemented within the new time frame because this is a political decision, and right now the political situation doesn t appear to be considering GST implemented on a priority. The biggest challenge in its implementation is basically the lack of partnership between the state and central governments. Until the centre and states do not share a mutual understanding on the issue, it will stay on hold. He concludes, However, I am hopeful that if the government in power remains the same, GST should be implemented by around March or April PROGRESSIVE GROCER July 2012 AHEAD OF WHAT S NEXT