For quite a while now, multiple indirect tax legislations have been in vogue, which led to significant compliance and administrative costs, classification and valuation disputes and more often than not impaired the ease of doing business.
Input Tax Credit
The above issues appear to be addressed to a large extent with the introduction of Goods and Services Tax (GST). As one can observe, it tries to mitigate cascading or double taxation issues, eliminate state boundaries thus bring down the overall cost of production of goods.
With regards to retail, space rentals are one of the main costs of retail stores and it attracts a service tax of 15%. Currently, the retailers cannot set off these costs like the other industries. Now, they will be able to probably use this as Input Tax Credit.
On another completely different angle, Selection of Manufacturing Location, Warehousing location and its size, vendor partner, which were hitherto largely assessed considering levy of State Taxes more minutely while compared to other aspects such as operational efficiencies or the like, a relook is prompted. Thanks to GST.
Challenge For Organized Retailers to Compete With Unorganized Ones
If one were to look at the furniture market, it is quite fragmented and with organized retail accounting for 10% of the total business, it is going to be a challenge for such retailers to compete with the unorganized retailers in the short run. With a tax levy of 28%, the category is slated for a step up from existing tax structures.
If there is a conscious effort to migrate the unorganized players to the organized sector, which is hopefully a doable goal in the medium run, then we can look forward to some interesting times ahead.
Manufacturers Of Handcrafted Furniture Likely to Lose Exemption Benefits
While this is true for most retailers, manufacturers, especially of handcrafted furniture, are likely to lose their earlier exemption benefits and get taxed at the same rate as factory-made furniture. What this could translate into as outcomes when we look at artisans or exports is anybody's guess.
Increase in Working Capital
On the flip side, possibilities are likely for an increase in working capital, as stock transfers are deemed to be supplies and are subject to GST. Realization of this GST would only occur when the final supply is concluded. Therefore, companies would maybe like to rethink their supply chain management strategies to minimize this impact on their cash flows.Free samples may be subject to GST, volume-based discounts received at the year end after supply will not be entitled to GST benefits.
Separating the Wheat From the Chaff
However, amongst organized players and the semi-organized ones, we can look forward to operational, especially supply-chain efficiencies, playing a much more pivotal role and helping separate the wheat from the chaff. I am confident that transparency and a level-playing field will help mature this category sooner than later.
Retailers to Revise Prices
From a consumer perspective, the jury is still out. Retailers and furniture players are expediting the process of revisiting and maybe revising prices and we will be closely watching their responses and reactions in the next few months.
All these aspects are quite important from any organized furniture retailer or manufacturer. Given that this category is going through a steady-paced transformation into the organized sector, it will be worthwhile for the stakeholders to quickly and smoothly adapt them, after all, the entire value-chain needs to optimize itself so that the end-customer can benefit and overall product absorption will also increase in the market.