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The picture remains hazy for India Inc a month after the goods and services tax (GST) was introduced. Companies across sectors from fast-moving consumer goods (FMCG) to retailing, real estate and construction say they are grappling with transition challenges as trade, shoppers and suppliers struggle to make the switch.
Manufacturers, in particular, have felt the destocking pinch the hardest, as the FMCG trade steps away from giving purchase orders to companies. Most traders and small-time suppliers Business Standard spoke to say they need time to fully transition to the new regime. Many privately say they are clueless on how to start.
Companies claim they are doing their best to get the trade into the GST net — organising seminars, starting helplines and getting consultants to help with the nitty-gritty of filing returns. The process is expected to continue through the September quarter, as most of these channels are not directly under the supervision of companies.
Sunil Kataria, business head, India and South Asia, Godrej Consumer Products, says: “The GST is a huge reform and the transition will take time. While our internal systems are ready, beyond distributors, the wholesale channel that forms a huge part of trade in FMCG, and is beyond our control, is still in transition mode. This switch will take time, at least 30 days (to be completed),” he says.
Sunil Duggal, chief executive officer (CEO), Dabur India, endorses this view. He says, “While the GST will be beneficial in the long run, short-term disruptions remain. A lot of wholesale in my view will become compliant and start doing business, though this could take a little longer than expected.”
Organised retailers say confusion prevails even a month after GST implementation. The biggest issue, according to many, is the billing structure applicable today vis-a-vis a month ago, prior to the GST.
“While you now have the GST in place of VAT (value-added tax) and sales tax, there is fear among buyers about bills being inflated. Sales are sluggish, though a little better than the first two weeks of July,” says Neville Noronha, managing director at D'Mart, the Mumbai-headquartered value retailer.
Kishore Biyani, CEO of Future Group, the country’s largest retailer in the organised sector, says fear about inflated bills in stores has temporarily impacted the footfall. This compelled his group to release a consumer campaign last weekend to clear the air. “The rumour-mongering about the GST and billing in stores compelled us to act quickly,” Biyani told Business Standard.
The retailers Association of India gave a representation on the issue to the Union finance minister last week. It has asked that retailers be allowed to issue cash memos with details of all articles sold and the net price, including the GST, realised for each item. All prices should be inclusive of the GST, says Kumar Rajagopalan, CEO of the Association.
Real estate developers, especially those building premium and luxury properties, say demand has dampened with the introduction of the GST. The reason is the increase in tax on properties sold.
“Developers cannot absorb the increased tax, as the markets are down,” says Vijay Wadhwa, chairman at Mumbai-based Wadhwa Group. “The 12 per cent GST is quite heavy.”
Prior to the GST, home buyers were paying 4.5 per cent service tax, in addition to state VAT at varied rates (1 to 4 per cent). Under the GST, the construction sector has been put under the 18 per cent slab.
Though applicable only on two-thirds of the sale price, the effective rate is 12 per cent, which is steep, sector experts say.
Amit Bhagat, chief executive at ASK Property Investment Advisors, says: “In the case of luxury properties exceeding Rs 7,000 per sq ft in cost, there is an additional burden of 1 to 3 per cent. If developers absorb it, it is fine. Otherwise, there will be an impact on sales.”
Amit Agarwal, analyst with Nirmal Bang Securities, says: “In Mumbai, the land cost is as high as 50-60 per cent (of the total). In such a case, apartment costs have gone up by 4-5 per cent, as the input cost is not sufficient to offset the tax increase from the earlier 5.5 per cent (service tax and VAT) to 12 per cent under the GST.”
Premium developers such as Oberoi Realty have decided to absorb this effective increase in tax. Many others are not doing so, passing on the hike to potential buyers.
