GST Countdown: Why Tax Treatment On Roti, Kapda, Makaan May Disincentivise Quality
Will the online versus offline battle continue after July 1?
With just 22 days to go for the goods and services tax (GST) regime to kick-in, retailers across India are struggling for clarity on stock transfers, destocking and tax treatment for promotional offers. On BloombergQuint’s special series, GST Countdown, Kumar Rajagopalan, chief executive officer of Retailers Association of India (RAI), lauded the the benefit of input tax credit for retailers but said that by keeping different rates for same category of goods, the government is disincentivising quality.
Here are edited excerpts from the conversation.
The rates for all categories of goods are now out. Did the rates for any category come as a surprise for the retail industry?
If you look at the overall ethos of taxation, things are okay. But when you go into some level of detail, there are issues. We all know that it’s a roti-kapda-makaan (food-clothing-housing) kind of a country that we are living in, and we want to see what is the impact of taxation on all these three products and how the authorities have dealt with these three main consumption items.
Look at the food part of the business, that’s a surprise because if you are packing an item and selling it, there is tax attached to it – from 5 percent and it can go up to 12 percent. If it is not packed, and sold loose, then there is no tax. Are we saying that packed items are not good for consumers? Or are we saying that packed items mean that people are making more money? Neither of these are true because this country has had adulteration as a big issue and when people take additional step towards packaging, keeping it in hygienic conditions, giving it to customers, putting their name on it, they are giving them a guarantee. I think it’s a service.
You should be incentivising them rather than disincentivising them. The Food Safety And Standards Authority of India (FSSAI) has been working towards creating food security in this country. On the other hand, we have got this taxation which says, ‘If you pack, I am going to tax you’.
Tax Burden Too High?
You mean that something getting packaged today can be sold as an unpackaged commodity tomorrow?
It could, because when you go down to the place where retail is happening, people could just open up various things or just bring it in large sacks and start selling oil, pulses, etc. Various things will get sold as unpacked and it’s not a very healthy sign for India. So, from the health angle, we are taking a very huge risk. So, that’s one.
Let’s come to kapda or clothing, again a surprise. Why would there be a differentiation within a category in terms of the pricing? That’s not a very logical thing to do, because how does it matter. Because some items have got much better inputs, more design and then if it is Rs 1,000 or more, you are keeping it at 12 percent and if it’s Rs 1,000 or less, it’s at 5 percent. Why make this differentiation? Are we saying that people who buy an item at more than Rs 1,000 are very rich? They should be taxed so much?
This is a concept that has been on many people’s minds because of traditional thought processes, where we’ve thought that consumption is bad. But frankly, consumption is good for the economy. It increases GDP. We believe that consumption is bad so we end up saying that if somebody can afford Rs 1,000, that person is very rich and has to be taxed. But you have created an angle in this which is going to create more issues. Within clothing, there is one more sub-category that’s got treated even worse –footwear. It goes from 5 percent to 18 percent if it Rs 500 or above. Why? Because people should not wear shoes? They should only wear chappals (slippers) and walk around?
Balancing Act
But the aim was to achieve a revenue neutral rate and that cuts both ways. While the government doesn’t want to tax you extra, it doesn’t want to lose money either. So, that categorisation had to come and you have to use some measure; right?
If it has to be revenue neutral, keep it at 18 percent all across. Or bring it at the level of clothing at 12 percent. Traditionally, the incidence of taxation in footwear has always been high. At RAI, and the footwear association, there have been so many petitions and we have urged the government to have a relook at footwear. The finance minister and the prime minister have said that it’s an important category, and then we land in this high-taxation regime. Revenue neutral does not mean that if a mistake was made earlier, you retain that mistake. Bring it down to 10 percent, it’s not going to land us in trouble because we are going to make more people adhere to the tax.
Ninety-two percent of retail in India is unorganised or traditional; not because they can’t organise themselves but there is this worry that they do not want to land in the tax-paying bracket. So, we should not by any chance allow people to take escape routes because the tax rate is too high.
The last part is about housing. If you buy a house that is under construction, you are being charged 12 percent tax, and if it is fully constructed, there is no tax. Where is the logic in that? Retain it as it is. Plus, you have not done away with the stamp duty, that’s already a big hovering expenditure on consumers. So, while we are saying that there has to be only one tax when it comes to housing, they keep a GST which is at 12 percent for under construction and then also charge stamp duty. Once more, you’ve added a complication there.
Relief On Rent?
One of the biggest cost for retailers today is rentals. The average is anywhere between 12 to 15 percent and there is no credit for that but there will be once GST kicks in. Will that mean reduced costs for retailers and how much of that do you see getting passed on to consumers?
Retailers suffer in India because of very high cost of properties. Anywhere from 12 to 15 percent of their total turnover is actually rent. The mere tax on this is equivalent to about one percent of the total turnover for a retailer. In retail business, where 3 percent is good retail, 3 percent net profit is good retail, and minus 3 percent net profit means dead retail, in that perspective, this one percent add-back is a very big amount of money. Retailers are working in a very competitive environment; so this would help in them creating some more capability to start giving better prices to consumer.
So, to that extent, it’s a wonderful thing to happen. And not just the rent, there are other charges, almost 25 to 30 percent of retail business has got expenses on which taxes are charged on which there will be an input credit in GST. So, it’s good news.
Change In Transition Rules
As per the transition rules, where the duty paying document is not there for existing stocks, taxpayers will get a credit of 60 percent of Central or State GST where the goods attract a tax rate of more than 18 percent; for goods below that, credit will be 40 percent. This has been changed from the draft transition rules. Are retailers happy?
To get the input credit for the stock in hand for transition into the GST regime, you’ve got to sell it within 3 months. This doesn’t happen in real business. For some FMCG products, it’s applicable, it’s nice and apt because you are expecting more than four turns in a year. But that may not happen with garments. Garments often have just three turns in a year, which is okay. Three-four months may not be the biggest worry.
But what happens to watches? They have very high tax incidence, people carry as much as two years of stock with them because these are not products that really keep getting marked down. You’ve got stocks lying with you for which you get no input credit after the third month. That means a big chunk of the stock in hand is going to get no input credit at all.
Similarly with jewellery, people carry as much as three to four years of stock because you can’t open a jewellery shop without that amount of stock. The point here is that you’ve always got gold, which does not depreciate so much. Again, you land in the same situation there. So, now people will find some creative methods of converting existing stock, sending it back, bring it back, show it as new stock. It’s a lot of mess.
But why should that be a problem if the existing stock can be sent back to the manufacturer and then shipped back as new product?
Because it involves a whole lot of shipping costs, it involves accounting for things that should not be done, non-value adding items that people have kept in stock. Why should you make people run around in circles ? And some of these manufacturers may not take it and that’s a big worry when it comes to retail. Retailers have many a time bought the items and kept with them and not all manufacturers are going to stand by them and tell them that “Now I am going to take care of all the losses you are incurring, thanks to stock in hand”. And that’s a big worry because it’s a risk.
What Happens To Freebies?
Any other specific areas of concern for retailers, for instance promotional goods, freebies, stock transfers - are all these aspects clear?
Yes, there are concerns. First, what happens when you sell gift vouchers? It’s a nice method of ensuring that customers feel like buying items from our stores. It induces loyalty. But now is it going to be treated as an advance from customers. If it is an advance from customers, what is the tax that has to be kept on top of it. Because it’s definitely not a legal tender. If the taxation has to be charged, if it’s a company that has multiple products at various tax levels, what is the tax that is to be charged on gift vouchers. And how does that input credit come through? Because you are showing it as an advance from the customers. For a manufacturing company it’s not certificate, for these kinds of companies it should not be shown as an advance.
Second question that retailers are facing is what happens to things like ‘buy one get one free’? Does that ‘one free’ gets attached to a tax regime, and at what rate? Maybe, retailers will start charging Re 1 on it. So, we need to see whether we have to come out with some advanced accounting methodologies for this or some other kind of working. What happens on inter-state transfers for retailers when goods are transferred within the same legal entity that has stores in different states? Because today such transfers are not considered as supplies but they will be under GST. How do you value them? It’s not clear.
GST On E-Commerce Marketplaces
Today everybody wants to go online because there is a cost arbitrage there as against an offline store. How will that come down, if at all, in the GST regime?
Two things have happened, which I’m very happy about. First, tax collected at source by e-commerce companies is going to help, it’s one percent. It’s not big, but it’s going to help in identifying who are the people who are transacting. It creates a trail which was missing and it’s going to help. The second part is that there is no more arbitrage between states. Otherwise, the biggest question in our minds has always been, if India is selling so many mobile phones, 600 million smartphones in the country in the last three years, there must be a huge amount of tax on an average rate of Rs 6,000. Where is that tax? No one has suddenly said that mobile phones are the ones that have taken care of government’s tax collection. We don’t hear it from the state governments. We don’t hear it from the central government. So where has the tax gone?
Did arbitrage exist because of the different rates of value-added tax?
Yes, and I think this will bring back a whole lot of visibility. It’s not that the visibility was not there. We had the VAT regime and if somebody was a registered dealer selling to a dealer, we could have caught it, but we didn’t.
Will the cost arbitrage then between an online and offline store come down?
One may see it or not see it, depending upon the business one is in. I don’t think it is going to be dramatically different. You see the difference even among online retailers. Competition is what brings cost down and we have to encourage competition. The offline marketplaces did not bring down cost because they were making more money; they were bringing down the prices because they were trying to take a share of the market. None of them were making money. However, any cost deduction for any retailer, be it offline or online, will create competitiveness and help the consumer.