India has emerged as a consumer market in the last couple of decades. With close to 13 million retail touch points aiding the end customer, in rural as well as urban markets, it can certainly be called a humungous task for manufacturers- especially the ones operating in FMCG sector to take care of the demand mechanism. What makes it all the more difficult is the fact that approximately 91% of the retail industry is in the hands of unorganized professionals. This is what makes it impossible for manufacturers to go the extra mile, primarily because of below-par channels of distribution.
The Indian wholesale market can certainly come to the rescue.
- Impact of GST on wholesale
As we understand the functionalities of how the wholesaler market operates, we also embrace the fact that not only the distributors in the supply chain, but also the wholesalers are an equally important part in the entire retail ecosystem. As the manufacturers might have started understanding the GST rates, they will be surely concerned about the kind of wholesalers they decide to associate with. With retail industry still recovering from the effects of demonetisation, the effects of a bigger wave, called GST, still remains to be seen. GST Bill India is all set to hit the Indian shores on July 1st, and its effects still remains the most debated topic.
Let us discuss in detail about the four methods through which GST is expected to transmute the Indian wholesale market for the better-
- More tax revenue through wholesalers
As we are well-versed with the fact that wholesalers are mostly responsible for bulk transactions for a wide-array of products. They deal in immediate cash transactions. Apart from this, they can opt to buy from either a manufacturer or a distributor as it entails separate tax liabilities for them. Since, it is a well-known fact that a majority of the wholesalers don’t have an excise registration and they are not liable to pass on that liability to the next person in the supply chain process. The chain of tax credit is broken pretty early. It must also be added that the taxation system in the current system is not transaction-oriented.
According to the GST regime, that follows the GST rates, every invoice related to taxable supplies must be uploaded on a common portal and must also be accepted by the buyer.
- Destocking of goods during transition
One of the major challenge that the wholesale market faces is that their business works on extremely low margins. The demonetization wave was also responsible for a huge cash crunch for them. They went ahead with destocking of the goods in order to bring in more liquidity to their business. Top FMCG majors have predicted the same once GST comes into effect.
Retailers that are currently registered under their respective State’s VAT laws would have certainly paid VAT on all the stock that they were holding on the date of transition. Some of the provisions have been made to GST Bill India, where VAT that was paid as per the current structure.
- Rise in direct channels of distribution
As the penultimate date of GST inches closer, a majority of the FMCG and players operating in consumer durables market are becoming cautious of their wholesale operations. Industry experts have also predicted that it will take at least a quarter for wholesalers to stabilise- leading to a significant downward spiral when compared with direct coverage.
This is primarily because of the fact that GST law comprising of separate GST rates will have a disruptive effect on the behavior of a wholesaler who is doing bulk transactions and selling only in cash. The implementation of GST would mean that more and more wholesalers will now fall under the tax umbrella- which will not only lead to increased efforts but also the costs. With margins already very thin, there will be a huge question-mark over their very survival.
- Emergence of India as an open market for wholesale
With the current taxation regime for indirect taxes driving decisions pertaining to supply chain decisions, the models are designed specifically taking care of the various tax liabilities, multiple taxes and other allied costs attached to inter-state supplies. As a result of this, wholesalers are required to conduct their activities with a very limited portfolio of products.
We can interpret from the above discussion that GST will surely transmute the Indian wholesale market in unimaginable ways. As there is a very huge chance that it might affect the wholesalers adversely initially, but its positive effects would only be felt in the long-run.