As the much-awaited goods and service tax (GST) implementation deadline of 1 July 2017 draws closer, consumer goods companies are gearing for its seamless implementation. However, the state of affairs as far as other stakeholders in the system distributors, and wholesalers is starkly different as these players are still worrying about cost increase, which could dent their margins, says a research report.
In the report, Edelweiss Securities Ltd, says, "Though GST will usher in efficiency and ease of doing business, it will lead to marginal increase in working capital requirement for various stakeholders in the overall distribution chain right from the consumer goods companies to distributors to wholesalers to retailers – essentially on account of GST being levied on supply of goods even if that supply is between warehouses."
Edelweiss says its interactions with consumer goods companies indicate that most players had commenced the process to be GST ready a long time ago and have the information technology (IT) systems and processes already in place. "Most have set up separate GST committees to take care of all the systems, processes and compliance required under the new regime and a few have also appointed consultants from the Big Four—PWC, Deloitte, EY and KPMG. Not only internal, but even IT systems of sales force’s hand held devices have been updated. Thus, our interactions indicate no significant issues as far as GST implementation is concerned from the company end," it says.
"However," it says, "the state of affairs as far as other stake holders in the system distributors, and wholesalers is starkly different. We anticipate some problems at the wholesaler end as many are outside the tax bracket and a few are improving their margins solely by way of tax evasion (a few operate on wafer thin margins of close to 1%, by being out of the tax net). Wholesalers make gains from unbilled goods which do not attract VAT. Hence, if a product which should have cost the wholesaler Rs112.5 (assuming 12.5% VAT and Rs100 product cost), costs him only Rs100. However, under GST, it will be difficult to evade taxes. Hence, we anticipate some pushback from wholesalers (and also some distributors/ stockists who are outside the taxation net), which could lead to some issues in trade."
On the positive side, Edelweiss says all consumer goods companies are planning to engage with distributors to ensure that the latter are registered with the GST department and have the software of companies installed in their systems and are also planning to hold sessions to educate distributors about compliance and other paperwork involved.
Edelweiss' key takeaways from its interaction with market players, include, destocking, increased working capital across the chain, larger market share gains from local players and and compliance cost, procedures to increase initially.
"With the deadline for GST registration coming to an end (30 April 2017), our channel check suggests that most distributors have got themselves registered on the GST portal. However, amidst excitement and curiosity, distributors are still trying to figure out the methodology to avail input tax credit, availability of credit on the stock lying from the pre-GST era, and tax rates. We believe akin to demonetisation, destocking will be seen in June 2017 with recovery in July 2017. The only difference though in the GST era will be that end consumer demand will not have significant impact, even as issues will arise in case of business to business (B2B)," the report says.
Edelweiss feels that initially the cost of compliance and working capital to move up even as GST will usher in better efficiency in the system via ease of doing business (one tax rate subsuming all other taxes); curtail cascading taxes; faster movement of goods; and savings in logistics costs.
"However," it says, "We believe working capital requirement will increase, especially as GST is levied on supply of goods (covers even stock transfers). Both companies as well as distributors will have to pay GST at the time of dispatch of stock even if they are supplied to their own warehouses, and subsequently claim credit on the input tax so paid. Also, the input tax credit mechanism will entirely be online and on real-time basis. For instance, if Company A supplies goods to say 100 distributors, it will need to upload all invoices on the GST portal. If Company A misses uploading say 5-10 invoices, the distributor will not be able to take credit. This will entail reconciliation process leading to a time lag."
"Many consumer goods companies currently have their factories in tax free zones and do not have to pay taxes on the goods supplied. Under GST, such companies will need to first pay tax and subsequently claim refund. This will also result in higher working capital requirement (procedural details inside)," it added.
Rates of tax, the most sought after number
While all eyes are on the GST Council’s meeting scheduled on 18-19 May 2017, when the likely GST rates will be finalised and announced, going by the general tone of the finance ministry till date, the likely tax rates seem to be as follows:
i. About 70% of the goods will fall under the 18% tax bracket – this could mean that most of FMCG products will fall under this category, which could be
ii. one of the biggest positives for the FMCG sector;
iii. processed goods could fall under 5% category;
iv. salt, milk, fresh fruits and vegetables could attract NIL tax rate.
The overarching confusion persists for the paint companies as on the one side there is a high chance of these companies also falling in the 18% tax bracket. However, considering that paint companies are high polluting industries, the tax rate might be set at 28%.
However, if the tax rate for FMCG companies gets finalised at 18%, then there could be a huge spurt in demand for the large FMCG companies and could also entail a shift in demand from unorganised to organised segment, Edelweiss added.
According to the report, there would be stringent regulations for movement of goods under the GST regime. "Under GST, e-way bills will need to be issued before goods are dispatched. It would be important to carry e-way bills for the goods in transit as an authorised officer could intercept the conveyance/ trucks to verify e-way bills. This will ensure that unaccounted, or non-tax paid goods are disallowed and restricted from moving easily. It will also lead the large organised players gaining market share from the unorganised segment," it concluded.
