A Retail Tale – 2


In continuation to my previous article, as I was telling you how the small retail shops would get benefit from GST. Eventually, by 2 means they would get benefited:

As we have much better clarity on the GST that now the overall price of the goods will fall. Lets deep dive into it to understand GST impact on price in detail:

Lets take the commodity journey from beginning, first the manufacturer has to buy the raw material to build the product, suppose its cost is 100 rupees, and the taxes on the segment of the product is 10%. Hence he pays Rs 110 for the material. Now in manufacturing he spent some Rs 50 and making a profit of Rs 80 now the cost of the product become Rs 110 + 50 + 80 = Rs 240. He sells it to a distributor after paying 10% tax, the distributor buys this and pays Rs 240 + 24 = Rs 264 to the manufacturer. Now in the journey of the product life-cycle, it has to reach retailers door. Now making a profit of Rs 50 the distributor sells the product to retailer at Rs 304, but again the distributor also have to pay 10% tax to government. The retailer ended up paying Rs 304 + 30.4 = Rs 334.4 to the distributor. Now at the final journey of the product it is being sold to the end consumer with a profit of Rs 50, the consumer will have to pay now Rs 334.4 +Rs 50 + 10% tax = Rs 422.84. Based on the earlier tax method, for a commodity costing Rs 150 consumer has to pay Rs. 422.84.

Also, not to forget that to earn Rs 50 small retail shop had to spend Rs 334.4, which makes the Gross margin on the product of 13%.

Now, with GST into consideration the maths changes as follow:
GST made Simple – A Complete Guide to Goods and Service Tax in India

First the manufacturer has to buy the raw material to build the product, suppose its cost is 100 rupees, and the taxes on the segment of the product is 10%. Hence he pays Rs 110 for the material. Now in manufacturing he spent some Rs 50 and making a profit of Rs 80 now the cost of the product become Rs 110 + 50 + 80 = Rs 240. He sells it to a distributor after paying 10% tax but now he has to pay tax only for his profit, the distributor buys this and pays Rs 240 + 10% of profit = Rs 248 to the manufacturer. Now in the journey of the product life-cycle, it has to reach retailers door. Now making a profit of Rs 50 the distributor sells the product to retailer at Rs 298, but again the distributor also have to pay 10% tax on the profit to government. The retailer ended up paying Rs 298 + 10% of profit = Rs 303 to the distributor. Now at the final journey of the product it is being sold to the end consumer with a profit of Rs 50, the consumer will have to pay now Rs 303 +Rs 50 + 10% tax of profit = Rs 358. With GST in action, for a commodity costing Rs 150 consumer has to pay Rs. 358.

Also, not to forget that to earn Rs 50 small retail shop had to spend only Rs 303, which makes the Gross margin on the product of 14%.

This will not only increase the in sales as the spending capacity of customer increase also it will the increase the inventory maintaining capacity for the small retail shop.

This was one aspect of it, another hidden opportunity for big companies is better planning.

Since, GST is implemented all small retail shops will also have to maintain their records for sale unless the whole transaction is out of GST starting from manufacturer. With this, these small retail shops can also be bought into main stream of the organized retail sector and they can play a major role in retail sector.
Disclaimer: Views expressed here are personal.

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