How Does GST Impact the Retail Sector?

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Published Date:  30-11-2023   Author:   twinkle-barot
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The Goods and Services Tax (GST) in India is a tax system focused on consumption, replacing several previous indirect taxes. It has been a major reform in the indirect tax system in India since its introduction in 2017. GST has brought about several changes in the taxation system for retailers, replacing a complex tax framework with a more streamlined and unified tax regime. 

It has integrated a multitude of indirect taxes such as VAT, service tax, and others into a singular tax, facilitating a clearer understanding and compliance with tax regulations in the retail sector.

In this blog, we will go through how GST works for retailers, its impact and positive effects on the retail sector.

How does GST work for retailers?

GST operates as a destination-based tax, signifying that it’s applied based on where goods or services are consumed. Here’s how GST works for the retailers:

1. Registration:

Retailers with an annual turnover above the threshold limit are required to register for GST. After registration, the retailers are assigned a unique Goods and Services Tax Identification Number (GSTIN) to distinguish them within the system.

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Business Type Annual Turnover Limit  GST Registration Requirement
Businesses Operating in Most States Rs. 40 lakhs for goods

Rs. 20 lakhs for services

Mandatory if turnover exceeds the specified limit
Businesses Operating in Special Category States Rs. 20 lakhs for goods

Rs. 10 lakhs for services

Mandatory if turnover exceeds the specified limit

2. Tax Structure:

GST has a dual structure, comprising the Central GST (CGST) and State GST (SGST). For inter-state transactions, Integrated GST (IGST) is applicable.

– Central GST (CGST):

CGST is the component of GST levied by the central government. It is a tax that contributes to the central revenue, ensuring a standardized application across all states. For retailers, CGST is important as it forms part of the overall GST liability.

– State GST (SGST):

SGST, on the other hand, is the state-level counterpart of CGST. It is imposed by the respective state governments on intra-state transactions. Similar to CGST, SGST is an integral component of the total GST, and retailers should be aware of the state-specific implications associated with it.

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– Integrated GST (IGST):

In scenarios involving inter-state transactions, where goods or services move from one state to another, IGST comes into play. IGST is a comprehensive tax that replaces both CGST and SGST for these transactions. Retailers engaging in interstate commerce need to consider and apply IGST appropriately.

3. Input Tax Credit (ITC):

One significant aspect of the Goods and Services Tax (GST) is the incorporation of the Input Tax Credit concept. This mechanism allows retailers to offset the taxes they’ve paid on their purchases against the taxes they collect on sales. It effectively prevents the cascading effect of taxes,  ensuring  a more transparent and efficient tax system.

4. Filing Returns:

Retailers are required to file periodic GST returns, including details of their sales and purchases. The returns help in reconciling the input tax credit and the output tax liability.

5. Compliance:

Compliance with GST regulations is crucial for retailers. This involves accurate invoicing, timely filing of returns, and adherence to other compliance requirements.

6. GST Rates:

Goods and services are classified under different GST slabs – 5%, 12%, 18%, and 28%. Some essential items may be taxed at 0% or exempted. Retailers need to charge the appropriate GST rate on their sales.

7. Composition Scheme:

The Composition Scheme is an alternative designed for smaller retailers operating under a specified turnover threshold. It simplifies their tax compliance process under GST, offering an easier way to meet tax obligations. Retailers opting for this scheme are relieved from detailed invoicing and maintaining extensive records required under regular GST compliance.

However, it’s essential to note that this comes with limitations on the benefits they can claim under Input Tax Credit.

Staying in the loop with GST updates is crucial for retailers, as the government tends to periodically revise rates or introduce new rules to make the tax system work better.

What is the conclusion of the impact of GST on retailers?

The retail sector stands as a significant pillar in India’s economy, contributing roughly 10% to the Gross Domestic Product (GDP). The Indian retail market is expected to reach $1.1 Trillion by 2027, with GST applicable to almost every retail supply affecting the cost for the consumers.

Let’s see what will be the impact of GST on Indian Retail Industry and which changes will this industry need to imbibe to become GST ready.

Aspect Previous Tax Regime Current GST Regime
Number of Taxes Multiple indirect taxes (VAT, CST, Service Tax, etc.) Unified tax structure under GST, reducing the number of taxes
Tax Burden Approx. 30% of the product cost Single tax ranging from 12% to 28%, reducing tax burden
Flow of Goods State borders affected taxation and documentation Free flow of goods across the nation, reducing complications
Input Tax Credit (ITC) Limited or no provision for claiming credits ITC allows retailers to claim credits, preventing cascading effects
Compliance Procedure Manual, varied across states Digitized and centralized compliance, reducing paperwork
Market Access Complexities due to state-specific tax structures Uniform tax rates across states, fostering nationwide market access

Reduced Multiple Taxes:

GST effectively replaces all the multiple indirect taxes being applied to the supply of retail products. Prior to GST, retailers were burdened with multiple taxes like VAT, CST, Service Tax, Excise Duty, among others, which summed up to approximately 30% of the product cost.

After GST, there is only a single tax, varying from 12 to 28% on different products. GST also reduces the cascading of taxes as the credit for input taxes can be now claimed by retailers. As the GST system has assigned everything into a single tax, the burden on retailers is lessened.

Free flow of goods across the nation:

With GST implementation, state borders have been dissociated from taxation and documentation point of view, allowing free flow of goods across the nation without any kind of barriers. This has increased distribution efficiency and reduced the complication for retailers.

Input Tax Credit:

Unlike the previous tax regime, GST has brought in the provision of input tax credit, in which a retailer can claim credits for the tax previously paid by him on the purchase of inputs. This not only saves tax but also reduces the cascading effects of taxes.

Reduced complications:

The less number of taxes means less complexity. GST is a completely digital tax system, that means retailers can plan and file the returns online without having to manage a lot of physical documents, accounts, etc.

Streamlined supply chain:

GST has introduced the concept of e-way bills, which has simplified supply chain management for retailers. This has reduced the time taken for the transportation of goods, resulting in faster delivery and reduced inventory costs.

Due to the abolition of CST under GST law, warehouses are no longer required for retail businesses in every state. Under GST, which is a destination based tax, tax is collected by the state where the goods or services will be consumed.

Therefore, under the GST regime, the place of supply for retailers will be the final location where the goods are delivered to the customers. This has made logistics efficient with provisions surrounding state border check posts.

Increased Threshold for Registration:

The threshold for mandatory GST registration is relatively higher than the earlier VAT threshold, benefiting small retailers who may not have been required to register under the previous tax regime.

Ideal For Startups:

The Government has already announced tax rebates for entrepreneurs and startups. With GST getting rid of the complications associated with the retail sector, it is inevitable that budding startups would tap into this opportunity.

Growth of Retail Market:

GST has played a huge part in unifying the markets by removing the complexities of state boundaries that hinder their business. GST has streamlined intra-state as well as inter-state transactions. Retailers can now expand their business beyond one state with ease due to one-time registration of their business. This has also contributed towards the growth of the retail market and the economy of the country.

The impact of GST on retailers has been very positive from both taxation and operations point of view due to the simplified tax structure, input tax credit, and streamlined compliance processes. It has contributed to a more transparent and efficient taxation system for businesses.

More than 90% of the retail industry in India is unorganized and works on cash payments. As GST is an online tax system which is levied at every stage where value is added to goods or services, the impact on retailers of all sizes has been very positive from both taxation and operations point of view. It has contributed to a more transparent and efficient taxation system for businesses with simplified tax structure, input tax credit, and streamlined compliance processes.

The input tax credit facility and easier entry into new markets have been some of the biggest advantages of GST for the retailers. Additionally, the reduced end price for consumers due to GST has enabled retail businesses to flourish more, thus contributing to overall growth of the Indian economy. Except for some clauses, GST has benefitted the retail sector in a big way.

Positive Effects of GST on Retailers:

Cost Efficiency:

  • Reduction in Tax Burden: 

One of the most prominent positive impacts of GST on retailers is the reduction in the overall tax burden. By replacing multiple indirect taxes with a unified tax structure, GST streamlines the taxation process for retailers. This leads to a decrease in the cumulative tax amount paid by retailers, translating directly into cost efficiency.

  • Operational Cost Savings: 

The simplified tax structure under GST contributes to operational cost savings. Retailers can allocate resources more efficiently as they navigate through a clearer and more predictable tax framework.

Improved Cash Flow:

  • Input Tax Credit (ITC) Benefits: 

GST introduces the concept of Input Tax Credit, allowing retailers to claim credits for the taxes paid on their inputs. This mechanism significantly improves cash flow by reducing the effective tax liability. Retailers can reinvest the saved funds into their business operations, whether it’s expanding product lines, upgrading technology, or enhancing customer experiences.

  • Financial Flexibility: 

The availability of ITC provides financial flexibility to retailers, enabling them to make strategic decisions without being unduly constrained by tax-related considerations.

Reduced Compliance Burden:

  • Online and Centralized Compliance:

GST brings about a paradigm shift in compliance procedures by digitizing and centralizing the process. This not only simplifies compliance but also reduces paperwork and administrative complexities for retailers. Automation tools and digital platforms further contribute to a more efficient and less burdensome compliance ecosystem.

  • Time and Resource Optimization: 

The streamlined compliance process allows retailers to redirect human resources and time towards core business activities rather than getting entangled in intricate tax-related paperwork. This results in enhanced productivity and operational efficiency.

Nationwide Market Access:

  • Uniform Tax Rates Across States: 

GST establishes uniform tax rates across states, fostering a seamless nationwide market. This uniformity eliminates the need for retailers to deal with diverse tax structures in different regions, simplifying expansion strategies.

  • Market Expansion Opportunities: 

Retailers can capitalize on the ease of doing business across state borders. This promotes nationwide market access, encouraging retailers to explore new territories without the complexities of navigating varied regional tax regulations.

  • Level Playing Field: 

The standardized tax rates create a level playing field for retailers, regardless of their geographical location. This not only fosters fair competition but also encourages a more dynamic and interconnected retail ecosystem.

Benefits Description
Tax Burden Reduction Unified tax structure leads to a decrease in overall tax burden.
Operational Cost Savings Simplified tax framework contributes to operational cost savings.
Improved Cash Flow Introduction of Input Tax Credit enhances cash flow management.
Financial Flexibility Availability of ITC provides financial flexibility for strategic decisions.
Reduced Compliance Burden Digitized compliance procedures reduce paperwork and administrative complexities.
Nationwide Market Access Uniform tax rates across states facilitate seamless nationwide market access.
Level Playing Field Standardized tax rates create a fair competitive environment for retailers.

 

Also Read:

How To Choose The Right Type Of GST Registration

What Are The Common Challenges Faced By Retailers Under GST?

Top 7 Benefits Of GST Registration In Special Category States

In conclusion, GST streamlines previous policies and taxation under one head to provide frictionless business activities expandable easily across the nation. The integration of multiple taxes into a single regime under GST has notably eased the burden on retailers, promoting operational efficiency and financial flexibility.

The collective benefits of GST have significantly impacted the retail sector in India by creating a more transparent, standardized, and efficient environment for budding, small and big retailers alike to thrive and contribute to India’s retail market growth.

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Twinkle Barot

Twinkle loves everything content. She brings over 5 years of experience writing for leading financial institutions, some of the Fortune 500 companies and fintech firms - simplifying complex financial concepts into clear, engaging content. She is committed to delivering high-value content that empowers clients to achieve their goals.

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