Monday, 8 August 2016

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:
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Location: New Delhi, Delhi 110001, India

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