A wholesaler in simple words, is a middleman between manufacturers and retailers. Currently, there is no mechanism to trace the tax liability on wholesalers, from the actual purchase of goods from manufacturers to the sale made successfully to retailers. This is because they operate without any commercial or business obligations, as most of their transactions are done in black, where no invoice is issued to the buyer, and eventually no entry is posted in the books for such sales either.
Lets examine what impact will GST have on Indian wholesale market-
1. Wholesalers acceptance towards GST
The bulk-buying nature of wholesalers allows them to bargain for lower prices from the manufacturer, and undercut the market to gain in volume which results in overall profit for them. Since this retailer-wholesaler dynamics allows manufacturers to achieve sales from those markets, where they are not able to handle direct retail sales and shipments – there is no stoping on the way wholesalers operate.
However, under the GST regime, every invoice pertaining to taxable supply has to be uploaded on GSTN’s common portal and has to be acknowledged by the buyer. Both wholesalers and retailers will now be unable to escape their tax liability. The only possibility for tax evasion would arise if the entire supply chain is outside the tax network and does not file a return under GST law, which is very unlikely. To avoid being boycotted by other businesses in the supply chain, come 1st July and many wholesalers will eventually move to the tax bracket.
2. De-stocking or Re-stocking, what will the Wholesalers choose?
Under GST Law, retailers can avail input tax credit on closing stock held before the implementation of GST. This however, is subjective to certain conditions such as, there should be a record of invoices that reflect tax levied on transactions to be able to claim tax credit. In most of the cases, the VAT / excise tax chain stops with the first stage dealers – wholesalers, and the tax is passed on to the retailers as additional cost. If this way of business operation continue post GST, retailers will be forced to pass on the tax cost to their customers, making their prices much less in comparison to other players in the market. This will lead to retailers across the chain having to de-stock the inventory during the transition phase, and again re-stock under the new GST regime. This business activity of retailers will have an adverse effort on the wholesalers who too will have to de-stock. If only the wholesalers become GST Compliant, sale through the hurricane akin to the demonetozation phase, this could all translate into a steep rise in demand for goods as a result of a widespread re-stocking of goods by wholesalers.
3. Will Direct Channels take over the Wholesale market?
From our above mentioned points, it is quite evident that wholesalers will have to transition to GST to sustain their business vertical. And, to come in their support will perhaps be the manufacturers they’re dealing with by reducing the cost of goods and increasing commissions , etc. But, to avoid so much chaos with the wholesalers, the manufacturers may also consider reaching out to direct channels for business, and if they in all probability do so then this step of theirs is sure to cause a major spike in company-owned-direct-outlets to carry forward the distribution of goods business activity.
4. The Wholesale Market will Revive
Good things happen to people, who wait! Considering the fact that post GST, there will be seamless availability of input tax credit across state boundaries, the supply chain will be more efficient. Manufacturers would like to expand their business to other home states as well through GST compliant wholesalers. And, wholesalers will make the most of the additional opportunity by generating more sales from existing retailers, while also serving more retailers in the same geography.
In Conclusion:For wholesalers, it is perceived that they will take about a quarter to adjust with the new tax norms. However, with their willingness to become GST compliant they are sure to experience more benefits in terms of revenue and overall growth.