Unsure of the fate of tax credit on their existing stocks, several brands and retail stores have started offering massive discounts ahead of the Goods and Services Tax (GST) rollout on July 1. Though some relief on availing pre-GST regime stocks has been given by the government, businesses still want to do away with as much stocks as possible.
If the thought of an early seasonal discount on clothes and other goods makes you sweat, you can buy an air conditioner at a 25 per cent discount to cool yourself down. While the government and political spokespersons for the party in power have been trying to allay fears, there is no denying that the new tax itself is a mystery to many. Some finance department officials, including finance secretary Hasmukh Adhia himself, have been meeting with industry and trade bodies to explain how the new tax regime and the transition to it will work.
GST is a new indirect tax meant to replace a list of 18 existing indirect taxes with two exceptions: customs duty for import and export of goods and services and Securities Transaction Tax on purchase and sales of shares and securities.
The government has directed that goods manufacturers and services providers register themselves on the GST network (GSTN), a digital platform, by June 30. As yet, there have been 90 lakh reported registrations on the network. If anyone in the supply chain doesn’t register, others will have to automatically boycott him because they will not get their input credits if they deal with businesses that are unregistered under GST or those who do not enter details of transactions under GST. The system will require a monthly filing of returns. However, the deadline for the first filing is September 15 in anticipation of audit and online filing difficulties.
“The resistance to the transition is a little surprising from one perspective,” says a finance department official. “Indirect tax is not easy to understand but GST has simplified it into a single window regime and it will do away with having multiple tax accounts, payments, returns and audits.”
But a tacit panic is visible as both online and offline stores have offered major discounts on their products in order to either stay safe or cash in by clearing their pre-GST stock. Mobile phones buzzed with announcements of discounts available on clothes, footwear, accessories, electronic appliances, furniture, mobile phones and so on. Online markets such as Flipkart and Amazon offered previews of the stocks being sold on discount before the special ‘pre-GST’ sales began.
While apparel stores are offering anything between 30-50 per cent discounts, online, the discounts are massive. Electronic wallet Paytm is offering cash backs of Rs 20,000 on TV purchases; Amazon’s home and kitchen store is offering between 30-70 per cent and Tata Cliq is offering discounts on major clothing and footwear brands up to 60 per cent.
Although, retail stores not owned by companies directly are reluctant to take in fresh stock. “These stores are not taking in fresh stock during this period. The company will have to eventually take a loss because we had expected that the new tax regime would be rolled out from the next financial year,” says a COO with a major foreign footwear brand.
Earlier in June, the GST Council—a high-powered body led by finance minister Arun Jaitley tasked with rolling out the tax reforms—announced some relief for the retailers. For goods that attract 18 per cent and more GST, dealers can file for 60 per cent of tax credit. For goods that attract less than 60 per cent, there is a 40 per cent tax credit. And there’s a 100 per cent excise refund for serially numbered and branded products that cost above Rs 25,000. Dealers can file the claims in 90 days to avail the due credits.
“There are two chief reasons why there is a rush to sell stock,” says a tax consultant of a major accounting firm. “There will be some tax credit loss and so most people want to get rid of stocks before July 1. Most dealers and retailers don’t seem to have the full message and some even think that the entire tax credit will be lost. That is not true. The other reason is that to claim the credit, there has to be an inventory of the transition stock on June 30. That will require quite a bit of manpower. That is why many of the sales are till June 26.” The businesses seeking credit have to issue a Credit Transfer Document (CTD) by June 30 based on inventories of transition stock completed by that date.
The national spokesperson for the BJP on economic affairs, Gopal Krishna Agarwal, gives another reason for the rush: “Under the new tax regime, businesses will not be able to avail VAT credit allowed under the older tax laws. So they are getting rid of existing stocks,” he says.
“People are apprehensive of the new structure and the invoicing system and so on. The system is not yet streamlined and there will be initial operational problems during implementation and migration. But it will create a single market across the country and make India the largest transaction capturing system under GST with 300 crore transactions per month,” he adds. Agarwal claims that India is the least tax compliant amongst developing nations and expects “short-term pain” during the migration.
Many stores have also reported heavy duty cash transactions, especially foreign luxury retail brands as there are apprehensions that there will be a crackdown on high-amount cash transactions post GST. But Agarwal feels the GST will not affect payments being received in any form whether cash or digital. “It is only an incentive to ensure that the entire chain of manufacturers, distributors, dealers and retailers enter details at each level so that there is no indirect tax evasion. If a retailer doesn’t enter all the details of his sales, he will not be able to take the credit of his input tax and so the tax burden will come on him increasing his cost factor. The minute he files online, he can automatically avail the input credit. Besides, businesses do not have to rush for assessment to the tax departments and a clear audit trail will also be established,” he says.
Also, businesses are not just selling out their stock. In the last month, the import of several goods has shot up which will come under the GST net such as gold (three per cent GST), silver and precious stones, almost doubling the trade deficit for the month. Following the festive and wedding seasons, experts claim that businesses have stocked up on gold much before the next season begins in anticipation of the GST to be levied on it.
Agarwal further explains how GST will widen the hitherto murky indirect tax net. “Until now, everyone paid taxes on anything they bought. Even a child buying a pencil was paying 25-30 percent indirect tax. But it didn’t reach the government as it wasn’t entered into the network. Now, the indirect tax net will widen and the government will have three choices in how it will deal with the additional funds. There could be a cut in the tax rate or more government spending on infrastructure and social security,” he says.
GST will rely heavily on technology since all documentation including invoices and challans will have to be uploaded to the GSTN. Several consultants have started offering solutions for that. A recent collaboration by HP and accounting firm KPMG provides a platform for registration, electronic invoicing, cloud storage for the invoice data and so on.
“After the initial problems are ironed out, GST will bring in transparency and ease of doing business at all levels including the MSME sector and give a fillip to those buying Indian-made products. By 2019, we will have the resources and the economic roadmap will be charted out,” says Agarwal. The significance of 2019 will not go amiss for political observers.
