'GST unlikely to hit consumer demand, but traders my be hit'

Consumer demand is unlikely to be hit after goods and services tax (GST) comes into effect, even though distributors are expected to destock in June, and issues may come up in case of B2B trade, says a report.
"We believe akin to note-ban, destocking will happen in June but will recover from July when GST is scheduled to be rolled out. The only difference though under GST will be that end-consumer demand will not have any significant impact, though issues may arise for business-to-business traders," brokerage Edelweiss said in a report today.
GST is expected to usher in better efficiency via ease of doing business, curtail cascading taxes, faster movement of goods thereby saving logistics costs, the report noted.

One reason destocking is expected in the trade channel is the ambiguity surrounding input tax credit on the goods already manufactured or bought in the pre-GST era.
The draft GST rules has clarified that as a part of transitional provisions, full VAT credit balance will automatically become part of the opening balance under GST.
Further, for goods lying at warehouses on which excise duty is paid, the amount will become part of the opening GST balance, and if the excise value is not ascertainable, then 40 per cent of otherwise payable excise will be considered for the opening GST balance.

Since this clarity will not be available in the within smaller distributors or retailers, some level of destocking will be unavoidable, the report noted.

The report also anticipates that working capital requirement will increase, especially as GST is levied on supply of goods.
"Companies and distributors both will have to pay GST at the time of stock dispatch even if they are supplied to their own warehouses, and subsequently claim credit on the input tax so paid," the report pointed out.
Also, the input tax credit mechanism will entirely be online and on real-time basis. Any delay by the company in uploading invoices could entail reconciliation process and the distributor will not be able to take a tax credit leading to a time lag, it noted.

Further, many consumer goods companies currently have their factories in tax-free zones and therefore do not pay taxes on the goods supplied. But under GST, such firms will need to first pay tax and then claim refunds.
This will also result in higher working capital requirement, the report said.
Moreover, initial compliance-cost also likely to rise for both companies and distributors and consumer goods companies have already began price hikes, benefits of which will be passed onto distributors to maintain margins,it noted.
It is anticipated that over 70 per cent of goods are expected to fall under 18 per cent tax bracket, which is positive for the FMCG sector as most products will fall under this category. This will ensure spurt in demand, and also lead to a shift in demand from the unorganised to the organised segment, the report said.

Under GST, e-bills will be issued before goods are dispatched, which have to be carried for goods in transit to ensure that unaccounted/non-tax paid goods are restricted from movement. "This will lead to large organised players gaining over unorganised ones," the report said.