The pre-GST grand sale

Why companies are scrambling to clear old stock ahead of GST implementation

7428.net

Ever since the Goods and Services Tax Council began releasing the rates on various items in May, companies ranging from e-commerce platforms and car manufacturers to apparel retailers and phone manufacturers have been bombarding registered customers and other recipients with messages, emails, and phone calls, offering attractive discounts valid till June 30, a day before the GST kicks in.

But why are they doing this? It surely can’t be that they are celebrating the roll-out of the new indirect tax regime. By all accounts, most companies are quaking, fearing the huge increase in compliance costs and paperwork that GST will bring.

Multiple reasons

There are multiple reasons why companies are looking to get rid of their stock before July 1, including expectations of change in future prices, stringency of government laws, and tax complexity.

If companies, like luxury carmakers for example, feel that the prices of their products will go down in the new tax regime, then they have two reasons to get rid of their current stock. The first reason is economic.

They’ll craft their discounts in such a way that even the discounted price is higher than the likely price of the car post-July 1. Most experts feel that the cost of a luxury car — to be taxed at 28% plus a 15% cess — will come down by about 1.5-4.5% under the GST. That works out to ₹75,000-₹2,25,000 on a ₹50 lakh car.

The other reason companies fearing a price reduction are getting rid of their stock now is because they fear government action against profiteering — that is, benefiting from a reduction in tax rates that have not been passed on to customers. The penalties are strict, including a fine and a possible cancellation of the company’s registration. So, companies are doubly eager to avoid such a scenario.

Some companies may see the prices of their products go up. This, they expect, will bring its own share of problems. At a time when consumer demand is tepid at best, thanks to slowing economic growth, poor wage growth, and demonetisation, even a small increase in price is likely to encourage consumers to defer their purchases. And so Flipkart, Amazon, and all the other e-commerce companies are pushing huge discounts to attract customers.

The stock clearance sale could also have been prompted by a lack of clarity on what will happen to the old stock — products that were bought before the GST but need to be sold after its implementation. Government rules make this a complex question — the fate of their stock will depend on whether the company was a registered taxpayer before the GST, and whether it is a first-stage dealer, second-stage dealer, or importer. To avoid these hassles, companies are trying to get rid of all their stock and face the GST with a clean slate.

In the meantime, as a consumer, enjoy!