NEW DELHI | MUMBAI: A tussle has erupted between large consumer companies and organised trade just ahead of the introduction of the goods and services tax (GST) on July 1. Companies say that large retailers are refusing to buy fresh stocks starting June 26 till the month ends, while retailers want consumer companies to protect margins.
“Educating over 4.5 million retailers is a significantly big task and there is confusion among the trade about buying fresh stocks now,” biscuit maker Britannia’s managing director Varun Berry said. “There will be some wholesalers and retailers who will be out of stock for a while, leading to a shortage of products on shelves. While in the long term, GST is positive, it will take about a quarter for things to settle down.”
Marico managing director Saugata Gupta said the transitory disruption is expected to stabilise by next quarter.
“There is a significant thinning of the inventory pipeline since a lot of the trade is not buying new stocks just ahead of GST,” he said. Marico makes Parachute hair oil and Saffola oats.
A fortnight ago, the biggest names in the country’s organised retail sector — Future Group, Reliance Retail, Tata Group, D’Mart and Aditya Birla Retail — said they wanted consumer companies to protect their post-tax absolute margins instead of only the percentage after GST is introduced on July 1. GST will subsume the factory-gate levy, excise, thus reducing the absolute margins available to a retailer.
Simply put, if a product with a maximum retail price (MRP) of Rs 100 includes value-added tax (VAT) of 10%, retailers earn their margin percentages on Rs 90. But if the same product attracts GST of 18%, then a retailer will earn a similar margin percentage, but on Rs 82, translating into lower absolute inflows.
“Discussions over margins are still going on. But we have a contrarian view on destocking and have instead increased our orders by 50% so that end consumers don’t get affected,” said Kishore Biyani, chief executive of Future Group which runs the Big Bazaar, EasyDay and Nilgiris supermarket chains. “The fight over margins shouldn’t affect consumers.”
Most processed foods, home and personal care products, such as cookies, toothpastes, soaps and hair oils, will be taxed at 18% under GST compared with about 22% in the current indirect tax structure of excise duty and value-added tax (VAT). However, detergents, shampoos, and skin-care products will attract 28% GST.
Distributors and retailers will down-stock before GST as transition rules imply a loss of credit on excise already paid. This may not fully reverse post GST as companies may take the opportunity to make the pipeline leaner, according to a recent Credit Suisse report. Primary sales will be below consumer offtake and impact will not be the same for all companies as the extent of down-stocking will differ depending on current stock levels and the possibility of price drops after GST is in place.
Kumar Rajagopalan, chief executive officer of the Retailers Association of India (RAI), said: “Why should retailers take fresh stocks from companies till the time their existing inventory is not liquidated and their margins are not protected? This scenario is likely to continue for at least some time till the GST implementation is completed smoothly.”
Through May and June, companies have been offering the trade product and cash discounts to push stocks ahead of July 1, saying that managing and evaluating inventory across millions of outlets in the pre-GST and post-GST scenario will be a mammoth task, and also to avoid the same product having two maximum retail prices (MRPs).
But despite the step-up in margins by companies, retailers say they had reduced stock by about 25% since they didn’t want to be saddled with unsold stocks on July 1. A large, well-known Delhi-based retailer said: “We are not buying new inventory at least for a week till June 30. We are making do with existing stocks till there is clarity on who will take care of losses we could incur if we are left with transition (or unsold) stocks.”