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The likely impact of GST on retail in India
The liberalisation of the Central Government’s FDI policy on retail in September 2012 was widely hoped as a step that would catalyse investment into the sector. Taxand India focuses on the GST policy framework, which would have a significant impact on retail investment and operating structures.
Multiplicity of taxes and resultant cascading effect of taxes
GST is a comprehensive tax on the manufacture, sale and consumption of goods and services at a national level. GST system in India essentially envisages 2 taxes – State Level GST and Central Level GST. In principle, credit of GST paid on the procurement of goods and services will be available against the respective GST payable on the output supply of goods or services. Therefore, the system envisages a continuous flow of credit across all points in the supply chain without any breakage at any point. Most importantly, the focal point of taxation under GST is consumption – it’s the ultimate point of consumption where the tax cost sticks.
Tax on packing and labeling activities
GST would be structured on the destination principle. As a result, the tax base will shift to consumption. Under the GST regime, tax would be levied on goods or services at the ‘point of supply’ rather than for undertaking a ‘process’ (like packing / re-packing etc) in relation to supply of goods. Therefore, GST would be applicable only on transactions of supply of goods (and services) in the retail value chain rather than on the processes of packing or labeling that may occur at multiple levels. Overall, no additional taxable event is foreseen under GST for similar packing / labeling activities undertaken by retail chains.
Double taxation on property management services
Such levy of dual taxes on almost the same taxable base is expected to be mitigated under the GST regime where tax is proposed to be levied on ‘supply’. It is likely that the difference between goods and services for tax purposes would get dissolved under the GST regime and double taxation issues relating to property management contracts may be avoided.
Retail price linked valuation issues
The applicability or otherwise of MRP based valuation in different scenarios is an extensively litigated aspect under customs/ excise laws in India and may continue to challenge under the GST regime as well, unless the Government discontinues MRP based valuation post GST. Similarly, valuation related disputes may continue to arise via various forms of gift vouchers, discount coupons and other promotional schemes under the GST regime as well.
In the GST system, both Central and State GST will be collected at the point of supply. Therefore, under this regime, taxes on different stages of production and distribution can become a pure ‘pass through’ and tax cost would essentially be incurred on final consumption only. As a consequence, revenues will effectively accrue to the State in which consumption will take place.
The retail sector, like any other Indian sector, faces a slew of indirect tax issues and is exposed to litigation on various fronts. It has been our consistent view that the Government must not only induce investment (through the FDI policy) but also create an environment that makes it operationally efficient to execute a business in India. GST is a very potent tool to drive this environment. In light of the upcoming elections, GST is expected to stand deferred, but we rank it as top priority for the new Government that is formed in 2014.