- All businesses have to pass on benefits from cost saving under GST to customers.
- CFOs are unclear on how to pass on the benefit from cost saving after claiming input tax credit.
- Retailers can expect 5% cost saving benefits over three year period.
Input tax credit is hailed as one of the important cornerstones of Goods and Services Tax(GST). However, there is a problem. Retail companies are clueless on how to pass on the benefits arising from it to customers.
At the Retailers Association of India (RAI) conference on ‘Retail in the age of one nation, one tax,’ on August 23, chief financial officers of retail stores spoke on the pains and gains in the Goods and Service Tax (GST) regime.
One of the most spoken of topic was the claiming of input tax credit under GST.
RAI CEO, Kumar Rajagopalan was of the opinion that retailers could increase tax benefits up to 5% over three years period by weeding out inefficiencies in the supply chain channel.
“Retailers could possibly increase the overall benefits over the next three years period of time,” Rajagopalan said.
During a panel discussion, CFOs of retail companies raised concerns that revolved around anti-profiteering laws. These laws strictly dictate that businesses must pass on the price benefits post GST to the consumers by ways of lowering prices of goods.
Even at the GST Council meet on August 5, Finance Minister, Arun Jaitley reiterated and appealed to the industry to pass on benefits from cost saving after claiming input tax credit.
The question that went unanswered at the RAI summit was – “How do we (retailers) pass on benefits arising from input tax credit?”
ED & CFO Future Retail, Dinesh Maheshwari said, “The intent of the government is clear. Benefits need to be passed on to the consumers.” However he went on to speak of lack of clarity on passing on benefits from input tax credit that was unclear at the stock keeping unit (SKU) level.
Adding to his thoughts on the panel, Spencer Retail CFO, Arvind Vats also resonated the same concerns.
He said that retailers can say they are selling products at the MRP prescribed by brands. In this case he pointed out the onus was more on brands.
Any benefit that manufacturers and traders gain in the process of production need to be passed on. However, he questioned – “How do they pass it (input tax credit) on?”
Input tax credit simply means that at the time of paying tax on a finished product, businesses can reduce the tax they have already paid on inputs and pay the balance amount instead.
“Expenditures like service tax on rental, service tax on various manpower supplies, service tax on various things like housekeeping which are all part of the business. But because they (retailers) used to sell with VAT and pay service tax as well they were not able to get a set off. Now all these becomes part of input credit because everything is GST,” Rajagopalan said explaining input tax credit.
The retail CFOs however were of the opinion that retailers could garner only up to 1-2% benefits of total cost base.
“We are expecting up to 100 bps cost savings after claiming input tax credit,” said ED, Future Lifestyle Fashions & CFO Future Retail, C P Toshniwal.
“The biggest advantage of GST that holds true for any retail company be it brick and mortar or any format of retail that now retail companies will start getting good amount of input tax credit on various cost line items which they were not getting earlier. So I think this will give around 100-200 bps impact on retail companies depending on their format of retail,” said CFO Spencer Retail, Arvind Vats.
“Benefit is all on the block tax credits like CST, octroi purchases, and service tax. All this has been factored in the effective tax rates for the industry. In our case it’s about 9½-10% because the tax rate is 12% so the benefit has already been factored when the GST rate has been fixed so it’s not very incremental. We are expecting an efficiency side logistics and delivery lead times. Clearly we are seeing a 20-25%reduction in the delivery lead times. These things will give a cost benefit over a period of time as unproductive things and wastages in the channel come down,” Executive VP & CFO, Arvind Lifestyle, S Kannan said.
He further added speaking about the benefits of input tax credit, “Maybe a 1-2% savings of total cost base. But if you look at logistics the benefits will be on the manufacture side costs, where they are gonna get a benfit. Only caution is that there is inverted duty happening in certain parts of the industry where you are not going to get a benefit. The input tax rate in those cases is higher than the output tax rate.”
Growth in net sales in the first quarter of FY18, non-discretionary and discretionary consumer goods was -2.1% and 9.2% respectively, as per a report by Care Ratings on August 21.
In the matter of outlook on second quarter financials, the retailers expect double digit sales growth on the back of the oncoming festive season, the retailers said.a