Impact of GST on the Indian Distribution Business Model

For the past few years and more so recently we have been hearing a lot about GST. Our FB and Linkedin pages have been flooded with posts and expert comments, on how GST is going to be implemented and how is it different from the prevalent Tax structures of India.

In this article I would be discussing on the impact of GST on the trade & distribution fraternity of India. Let’s not forget a huge number of small and medium businesses (dealing with Trading/Wholesaling/Distribution/Retailing of goods in India) would be impacted due to this new Tax reform. 

What is GST? 

“One Nation One Tax”: The GST ( Goods & Services Tax) is based on the draft model of the Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 proposed by Union Finance Minister Mr. Arun Jaitley.The Bill proposes to confer power on both the Center and the State to impose a uniform GST on the transaction of any Goods and Services in the country.

The GST is one of the biggest tax reforms in the country and addresses the following issues prevalent with current Tax regime:

1.  To impose uniform taxation policy and procedures throughout the country irrespective of the goods/ services category.
2. To curb the indirect taxation on the sale or purchase of goods/services. This indirect taxation has crept into the system due to the separate taxation policies by the Center and States.
3.  To reduce unhealthy competition among the States.
4.  All these and then to increase the band width of the current tax base and raise compliance.

                                                          

Structure of GST:

The draft GST will be having 3 main components:

CGST: Central GST [For intra-sate transactions]. The CGST would be levied on the goods sold withing the state and would be credited to the Center

SGST: State GST [For intra-state transactions].The SGST is the tax component that would be levied on the goods to be sold within state and would be credited to the State.

IGST:  Integrated GST [For inter-state transactions]. Whenever the distributors want to sell in some other state,IGST would be added to the goods which is on a one time.

Impact of GST on the Distribution Model:

Due to the current tax structure the companies who are into the distribution model currently follow the below structure(refer: pictorial representation):

Current Distribution Model

In this model the companies who have to sell their goods to a customer in some other state have to maintain a warehouse in that state.Then they transfer the stocks to that depot and then sell the customers from locally. The Companies do so in order  to keep the cost of the goods uniform throughout the country . 

As per the current tax structure if goods are sold to a customer in another state, CST is applied on the goods @2%, which is paid to the Central Revenue Department and is non-refundable. After this transaction is done,if the distributor wants to resell the goods to some other retailer/customer within the state then it applies a VAT (as applicable in the state)on it. However, if the distributor wants to sell it to some another customer, in some other state then again a CST is added on the goods.So,each time a trader resells it in some other state the goods get costlier.

All these generally forces companies to avoid direct sales to its distributors/trade.The companies thus do a stock transfer to it's local warehouse in the state of sale( against a H form) and then sells it to the customer applying VAT on the goods.

With the implementation of GST,all these steps would be removed and IGST will be applied on inter state transactions. 
Thus there would be only one intermittent tax ,that would be applied on the goods. This also means that the current structure followed by all the businesses to hire 3rd party warehouse providers would be of no use then.In fact the WSP would be an additional burden on the business when GST comes into force.

The new tax structure will eventually push the companies for a new form of distribution model so that they don’t shell unnecessary cash to the WSPs(Warehouse Service Providers).

The distributors of tier 2 & tier 3 towns are also going to get benefits as the net landing to all the distributors would become uniform.Presently,due to state wise variation in VAT,sometimes a difference in distributor landing gets created in some goods.This promotes cross territory selling by the distributors ,from lower VAT states to higher VAT states. 
Then there are some states now who have an additional parallel taxes like octroi and some cess due to which the goods entering these states get costlier. 

Next thing that the companies will have to look into is the MRP of the products.
The GST would bring in a destination based taxation policy and thus the MRP system would not hold any ground . This is because the total tax amount( thus the net landing) would change with each transaction on the goods.

Finally....

There are a lot of other tax related game changing moves that may take place in the distribution ecosystem. Eventually,everything depends on the final GST bill that will be implemented. The most important thing is that the companies have to change their distribution model to comply and take most out of the new system.The customers would be enjoying a higher stake as they would be getting maximum benefits.One thing is for sure that channel managers and sales executives are going to hear less channel conflict issues due to price differences caused by variation of local Taxes. 

Note: All these are my personal opinion based on research of various articles and discussion with tax experts. These may hold good or may change eventually on the course of the final implementation of the Bill.Please do suggest if any changes are to be made.

References:

• http://dor.gov.in/gstintro  
• https://www.quora.com/How-will-the-goods-and-services-tax-GST-work-in-India
• http://www.ey.com/IN/en/Newsroom/News-releases/news-ey-potential-impact-of-model-gst-law 
• http://www.ey.com/IN/en/Newsroom/News-releases/pe-ey--how-gst-will-change-the-way-india-does-business  
• http://economictimes.indiatimes.com/markets/stocks/news/gst-will-change-the-way-india-does-business-who-will-win-who-will-lose/articleshow/53517955.cms

5 Tips For Handling Channel Conflict

Channel Conflict is a very basic and regular phenomenon that may arise in any type of distribution model. I suppose there is hardly any sales executive or channel manager who has not faced it in their day to day activities while handling the channel network.

Now what is Channel Conflict ? Channel conflict in general means the conflict which arises among the channel partners and the company due to cross selling across territories, price disparity among channel partners, disparity in stock distribution to the channel partners, psychological assumption that there is favoritism to certain zone or channel partner or any other kind of conflict which may arise during the day to day operations in the channel business. Let’s discuss some of the techniques of handling the channel conflicts once they arise in the distribution network:

1. "Main Hun Na" : No I am not talking about the movie by Sharukh Khan, I am talking about reassuring your  channel partners that you are with them in this tough time and would be acting as a voice for them. Always remember that as a sales executive or territory manager you are that link which connects the company and the channel partners. Reassurance will not solve your problem completely however, you will at least get time to plan and take corrective actions.
2. Analyzing the facts: Before jumping on to any kind of conclusion it is always better to analyze the facts first and then judge on the basis of the analysis results. There may be a possibility that the channel conflict allegation is just a hype that has been created by the channel partners for pressurizing the company and its executives for extra incentives. So always act on facts rather than rumours.
3. Escalations: Once you have got adequate proof that the channel conflict has actually occurred, the next step is to take some action on the basis of the analyzed data. Now it’s high time take a call, whether you can sort it on your own or you need some help. If you think you need some help then escalate the issue. The best solution is to inform your immediate superior about the issue and keep them in loop. However, always remember to use humble and concerned words to communicate this rather than using bold or harsh tones. This will help you get attention of the team/management on the conflict and thus will help in some rationalizing effects.
4.  Educating Channel Partners & Taking Corrective Actions: All said and done you need to reach out to the root cause of the conflict and tackle it accordingly. If the channel conflict has risen due to price differences then this needs to be rationalized. The concerned channel partners need to be educated about the ways to tackle the conflicts. This may include asking them to upgrade to a higher tier, increasing their lifting etc. One other thing is getting the channel partners sign a non-territory violation treaty or contract so that the conflict due to territory violation can be mitigated. Many companies follow a channel specific/ customer specific packaging to control the channel conflict. 
5. Maintaining status-quo: Sometimes it is also important to maintain a status-quo. A lot of times channel conflict arises due to our own ambition to outdo sales. It may happen that the company has implemented a new strategy to boost sales. However, the strategy has backfired in its initial phase.  We need to be patient so as to give time to analyze what is the result of the strategy in the pilot phase. Gradually the strategy may be a hit after the 'pilot run' or it was a big mistake. We need to check the impact and take corrective measures if the conflict is actually killing the channel partners, before any irreversible change takes place.

These are some of the points which we may use for tackling channel conflicts. The points enumerated above may be used as a step by step process or may be used as standalone tricks to deal with a channel conflict. There are definitely various other ways too to tackle channel conflict. 

PS: These points have been put as my personal opinion which I have used or learned through my experience and studies.