With the GST’s implementation, the middlemen will come into the organised bracket and will have to pay taxes for the very first time.
Consumer goods distributors and wholesalers will face the brunt of the Goods and Services Tax (GST) as companies look to shift to direct distribution channels to save money, according to an Edelweiss report.
The report said that HUL has more than tripled its direct reach from 0.9 million outlets in 2009 to 3.2 million in 2013, while Godrej Consumer has expanded its urban direct outlet coverage by over 20 percent in 18 months till FY15.
Marico too, started with the objective to increase direct coverage in top six metros merging it into regular distributor coverage.
“Demonetisation has compelled players to turn the spotlight on expanding direct coverage…Direct distribution has not become a bigger focus of companies but with GST also coming in it should be the way forward.” said the report.
Apart from consumer companies’ shift to direct distribution, wholesalers and distributors are at a great disadvantage with the arrival of the indirect tax reform.
Being the middlemen, they make gains from unbilled goods that do not attract VAT. For instance, if a product which should have cost the wholesaler Rs 112.5 (assuming 12.5 percent VAT and Rs 100 product cost), costs him only Rs 100.
With the GST’s implementation, the middlemen will come into the organised bracket and will have to pay taxes for the very first time. This will lead to an increase in compliance costs and taxation for them.
Taxation of distributors will also have a small impact on consumer companies.
“This could push up overall distribution costs of companies, which in our view should not be more than 50 – 60bps and will be a one-time exercise as the same can be easily passed on to consumers,” the report forcasts.
The consumer goods manufacturers, on the other hand, are going to largely benefit from the GST.
The change will bring about stringent compliance norms that may affect the unorganised sector. This will shift the market share of the organised sector higher.
The report also said that most companies are becoming GST ready, months before it becomes a reality by tweaking IT systems and company processes.
“Most have set up separate GST committees to take care of all the systems, processes and compliance required under the new regime and a few have also appointed consultants from the Big Four—PWC, Deloitte, EY, KPMG,” the report added.