Ahead of GST rollout, producers, traders feel taxed:

Uncertainty over smooth transition to the new tax regime chokes up inventory flows

CHENNAI, JUNE 14: Recently, pharmacists in many cities sent out mailers to some of their regular clients, especially senior citizens. Stock up on your essential drugs, the customers were told.

The 'advisory' was not triggered by any trouble at the manufacturing end, but by apprehensions arising from the July 1 rollout of the Goods and Services Tax (GST), India's biggest-ever indirect tax reform.

The druggists were not sure if they would have adequate stocks of medicines, as they were worried about how consignments manufactured before July 1 would be treated under the new tax regime.

This concern over tax credit for old stocks cuts across sectors. More importantly, manufacturers are not sure how the GST rates that have been announced will affect prices. In fact, some two-wheeler manufacturers are even wooing customers by asking them to beat the GST and purchase bikes for a lower price now instead of buying in July.

While most sectors seem to be welcoming of the GST, they are unsure of how the implementation would take place. A few pharmacists BusinessLine spoke to, however, were sure that the confusion would be sorted out within a few days of the GST kicking in.

There is also the worry that not everyone in the value chain is GST-compliant. Chandrakant Salunkhe, President, SME Chamber of India, says the B2B business is being affected due to the switch-over. Large companies want their suppliers to be GST-compliant, while many of them are not geared up for the new tax system. Some companies, he says, have postponed their procurement to get the benefit of lower taxes when GST kicks in.

Large-volume businesses such as paper and cement trade are going slow due to concerns over losses in compensation during the transition. Traders prefer to keep stocks low to avoid confusion when GST kicks in.

Dealers and distributors, especially in the FMCG sector, have restricted fresh purchase of stocks from manufacturers. In the consumer durables industry, retailers are running discounts and special promotional schemes to dispose of existing stocks. It is the same with branded apparels.


Says Ashok Goel, Vice-Chairman and Managing Director, Essel Propack, a leading manufacturer of packaging material, "Companies are doing inventory correction before the [GST] rollout. We saw this in May and we are seeing it in June. We believe that in the final 10-15 days before the GST kick-off, we will see a complete lull as dealers will stop picking up stocks. But we expect to see a quick recovery in July and we anticipate a huge surge in demand."

Automobile parts suppliers say there will be no major change in their supply to the vehicle manufacturers. However, a few vehicle manufacturers want to make invoices only till June 25, due to concerns over credit as a consequence of the transition. The CEO of a leading tier-2 supplier to Tata Motors says there has been no rescheduling of parts supply, but feels there will be a slowdown in the last week of June.

At the same time, there is fear that the GST will push out small-scale traders in the retail business and the space will be dominated by larger players. "This would pose a bigger threat to small-scale traders and the situation may lead to a trade imbalance," warns KM John, Secretary, Ernakulam Merchant Chamber of Commerce.

(With inputs from Rahul Wadke, Suresh P Iyengar and Tanya Thomas in Mumbai; Meenakshi Verma Ambwani and TV Jayan in New Delhi; R Balaji, G Balachandar and Swathi Moorthy in Chennai; V Sajeev Kumar in Kochi; Vinson Kurian in Thiruvananthapuram; Ch Rs. Sarma in Visakhapatnam; V Rishi Kumar and KV Kurmanath in Hyderabad; and Abhishek Law in Kolkata)