Big Discounts and GST
This is a guest blog by Shikhar ( CA), my son.
Why are brands giving heavy discounts on their products right in the middle of the season?
- GST is the answer!
What has GST done that all products from clothing to cars to electronics are giving away stocks at half prices?
What is GST?
- GST is tax charged on every point where a business is adding value (making profit).
- GST aims to bring a larger number of businesses to pay taxes, yet keep the prices of products low.
- How is this possible?
By Input Tax Credit. This is the essence of GST. Let me explain with an example:
A manufactured shoes for Rs. 20. He paid a tax of Rs. 2.
B purchases those shoes for Rs. 40. He paid a tax of Rs. 4. He gets a credit of Rs. 2 (paid already by A).
C purchases these shoes for Rs. 60. He pays Rs. 6 as tax. He gets a credit of Rs. 4 (paid by B).
- So you see;
A paid Rs. 2 (10% of Rs. 20) as tax.
B paid Rs. 2 (10% of B’s profit i.e Rs. 40 – Rs. 20)
C paid Rs. 2 (10% of C’s profit i.e Rs. 60 – Rs. 40)
- GST aims to fulfil the goal of One nation One tax.
You must’ve heard of VAT, Sales Tax, Service Tax this & that tax?
Rollout of GST would abolish all other indirect taxes.
For example, there is a different tax (called CST) when you sell a product from one state to another and
a different tax (called Entertainment Tax) when you buy a movie ticket. All such taxes would be subsumed in GST.
- GST aims to give seamless tax credit to businesses.
- This is now possible because all the other taxes will be abolished and there is no need for a 1-to-1 matching of type of tax to get input tax credit.
Every business has various types of expenses, like paying rentals, hiring accounting professionals, participating in exhibitions or advertising in newspapers/hoardings. All these services are currently subjected to Service tax, input credit of which usually gets lost for smaller businesses.
- This also brings us closer to the answer of why retailers are doling out discounts on their existing stocks.
- Currently, the tax rate on clothing is 5%.
The new tax rate under GST will be 5% for apparel under Rs. 1,000 and 12% for apparel over 1,000.
- Let’s first decode the current tax rate from point of sale to manufacturing.
VAT – 5%. CST – 2%. Excise duty – 2%
In effect, the existing tax incidence on clothing is 9%.
- Clothes are going to get cheaper.
- The retailers want to get rid of their existing inventory also because:
- GST is going to increase documentation across businesses with a need for more stringent accounting of inventory levels, taxes paid and sales made.
2. There is ambiguity regarding the amount of input tax credit that will be available on sales made of pre-GST stocks post implementation. The government did little help by hinting that only 40-60% of the excise duty paid will be available for credit.
3. A large number of small businesses are expected to have bought stocks without invoices, evading taxes. They will find it very difficult to sell such stock as there would be no audit trail. Plus if they sell the goods, they will have to pay taxes from their pockets. Their only option is to sell such stock as they bought it, without any documentation.
4. Established businesses also want to start with a clean slate, avoiding the administrative hassles of maintaining different input tax credits for the stocks.