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GST GUIDANCE NOTE

ON
RETAIL SECTOR

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Index

1. Overview

2. Existing Taxation

3. Taxability under GST Regime


3.1 Levy of Taxes
3.2 Liability to Register
3.3 Composition Scheme
3.4 Sale of products by retailer through E-Commerce Operator
3.5 Benefit to Retail Sector
3.6 Likely GST Rates
3.7 Compliance challenges

4. Frequently Asked Questions

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1. Overview

1.1 Indian retail sector, which has been growing at an annual compounded rate of 10 percent with a
market size of USD 700 Billion (Rs.48 lakh Crores) in 2016, has caught global attention.
1.2 Indian retail sector has emerged as one of the most dynamic and fast-paced industries, due to
the entry of several new organised players. Market size is expected to touch USD 1.20 Trillion
by the year 2020 as a result of income growth, urbanisation and consumer attitudinal shifts.
1.3 India is the worlds fifth-largest global destination in the retail space and it accounts for:
- 10 % of the countrys Gross Domestic Product (GDP)
- 8 % of the employment.

1.4 Indian retail sector has come up with various innovative formats to provide an edge to their
products and services. The popular retail formats are as follows:
Supermarket
Hypermarkets/Shopping Malls
Speciality Stores
Fashion Stores
E-Commerce
1.5 While organized players target the urban population, Kirana Stores take care of household
needs in hinterland areas. There are approximately 12 million Kirana Stores in India translating
into an average of 10 stores per 1,000 Indians [Source: Business standard article dated
September 16, 2015]. Share of Kirana Stores Sales is about 85% of total Retail Sales in India.
1.6 Share of E-Commerce Sales to the total Retail Sales is about 4%, amounting to USD 28 Billion
(Rs.1.92 Lakh Crores).
1.7 FDI Policy for Retail Sector is summarized hereunder:

% of FDI
S.No. Sector Entry Route
Allowed
Automatic up to 49%; Government
1 Single Brand Retail Trading 100%
Route beyond 49%
Multi Brand Retail Trading 51% Government Route; Minimum FDI
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should be US$ 100 million; 30% of
the value of procurement should be
from domestic micro, small and
medium industries which have total
investment in Plant and Machinery
not exceeding US$ 2.00 Million.
E-Commerce Sector (B2C) -
3 100% Automatic
Market Place Model
E-Commerce Sector (B2C)
4 FDI not permitted
Inventory Model

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2. Existing Taxation :
2.1. Presently the retailer charges the consumer VAT or CST, depending upon whether the sale is
intra or inter-state.
Value Added Tax (VAT) is a multi-stage tax on goods that is levied across every
stage of sale within a particular State (Intra-State Sale), with credit given for tax paid
at each stage of Value Addition. VAT rates vary product to product and from State to
State.

Central Sales Tax (CST) is payable on the sale of goods by a dealer in the course of
inter-state trade or commerce. CST is levied under the Central Sales Tax Act, 1956.
However the tax is collected by the goods originating State. Currently, the applicable
CST rate is 2% against Form C. If C Form can not be issued by the buying dealer,
CST rate applicable would be equal to the VAT rate leviable in the State from which
the goods are sold.

2.2. Taxes and duties payable in the current regime by the Retailer on procurement of goods and
services and CENVAT / input credit eligibility thereof have been summarised below:

S. Taxable event Tax/duty Eligibility of


charged CENVAT / Input tax
No.
Credit
1 Intra-State Purchase of merchandise goods Excise Duty Not Available
from Manufacturer
VAT Available

2 Inter-State Purchase of merchandise goods Excise Duty Not available


from Manufacturer
CST Not available

3 Intra-State Purchase of merchandise goods VAT Available


from trader (excise duty / CVD embedded
in the product would be cost for the trader,
which he would factor in his sale price to
Retailer)

4 Inter-State Purchase of merchandise goods CST Not available


from trader (excise duty / CVD embedded
in the product would be cost for the trader,
which he would factor in his sale price to
Retailer)

5 Import of merchandise goods Customs Duty Not available


and CVD
SAD (Special Either upfront
Additional Duty) exemption or refund
available

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6 Capital Goods domestic procurement Excise Duty Not available

VAT Not available (except


in Maharashtra)
7 Capital Goods Imports Basic Customs Not available
Duty, CVD and
SAD
8 Entry of merchandise goods into the State Entry Tax Available, except in
Orissa, M.P,
Chhattisgarh and West
Bengal
9 Entry of capital goods into the State Entry Tax Not available

10 Entry of goods in to a Municipality or Octroi / LBT Not available


Local Body
Domestic procurement / import of mobile
11 NCCD Not available
handsets

12 Various input services received by Retailer Service Tax, Not available


for carrying out trading activity (Example: SBC, KKC
Lease Rentals, Warehousing and Logistics
Services, Security Services, Housekeeping
& Cleaning Services, Maintenance
Services, etc.)

2.3. Cascading of Taxes:

As most of the taxes paid by the retailers are not eligible for input tax credit in the current
regime as stated above, cascading of taxes results in cost going up for the retailer. Ultimately
the consumer bears the tax burden by paying higher price for the product.

3. Taxability under GST regime

3.1 Levy of Taxes by the Central and State Governments

In GST regime retailer will pay tax to both State Government (SGST or UTGST) and Central
Government (CGST) on each transaction involving supply of goods or services to consumers
within a State. In the case of inter-State supply tax (IGST) would be payable to the Central
Government

3.2. Liability to Register

Any retailer whose taxable supplies exceeds Rs.20 lakh in a financial year is liable to be
registered under GST and pay tax. In the case of retailers located in - North Eastern States,
Himachal Pradesh, Uttarakhand and Jammu & Kashmir, this threshold limit is Rs.10 lakh.
However, any retailer may voluntarily opt to take GST registration, even though his turnover
does not exceed threshold limit of Rs.20 lakh or Rs.10 lakh, as the case may be.

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3.3. Composition Scheme
GST provides that a registered person, whose aggregate turnover in the preceding financial
year did not exceed Rs.50 lakhs, may opt to pay in lieu of tax an amount calculated at such
rate as may be prescribed. In the case of traders, such composition levy is payable at 0.50 %
+ 0.50% of the turnover to State and Central Government. The rate will apply on his entire
sales including exempt sales. A person opting for composition levy:
a. shall not be engaged in the business of supply of service, except restaurant service
b. shall not make any inter-state supply of goods; or
c. shall not make any supply of goods through an electronic commerce operator
Kirana Stores having taxable turnover not exceeding Rs.50 lakhs may thus opt for
composition scheme. However, they cannot collect any tax from the consumers nor shall he
be entitled to any credit of input tax and the burden of taxes has to be borne by the trader.
Composition Scheme may not be really beneficial in certain situations, as can be seen from
the illustration given below:
S. Composition Regular Taxable
No Particulars
Dealer Person
(Rs.) (Rs.)

1 Price at which goods are sold to consumer


(MRP) 100.00 100.00

2 Composition Levy payable at 0.5% + 0.5% 1.00 NA

3 SGST+CGST (assuming 6% + 6%) NA 10.71

4 Net Sales Realisation 99.00 89.29

5 Purchase Price 70.00 70.00

6 SGST (6%) + CGST (6%) on purchases 8.40 8.40

7 Overhead expenses (input services) 10.00 10.00

8 SGST (9%) + CGST (9%) on overhead expenses 1.80 1.80

9 Product Margin 8.80 9.29

It needs to be noted that in GST, the regular taxable person can take credit of tax paid on capital
goods / storage racks etc. used at his store premises and also tax paid on rental charges for the
store premises / insurance taken to cover the inventory, which means that not opting
composition scheme may be more beneficial in many situations.
Further, the Kirana Store opting for Composition Scheme has to pay 1% levy on sale of
exempted goods.
Therefore, the Kirana Stores need to do a cost benefit analysis taking into account of the
categories of products that he would be selling from his stores and GST rate applicable on the
products and then he may accordingly decide whether opting Composition Scheme is really
beneficial to him

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3.4. Sale of products by Retailers through E-Commerce Operators:

Retailers selling their products through E-Commerce Operators have to raise tax invoice on e-
commerce customers and pay SGST/UTGST and CGST or IGST, as the case may be.
E-Commerce Operators shall collect an amount calculated @ 2% of the taxable supplies made
through them where the consideration with respect to such supplies is collected by the
operators from customers. The retailers can take credit of the 2% amount paid by the
operators and adjust such credit against their output liability.
A separate Guidance Note is being published covering E-Commerce Sector.

3.5 Benefits to Retail Sector in GST Regime:

Introduction of GST will bring significant benefits to Retail Business through various
avenues.
Firstly, the Country as a whole will become one common national market and procurement &
movement of goods from one State to another State would be less cumbersome. Organised
Retailers can create supply chain models based on transportation efficiency rather than tax
implications, since CST, Entry Tax and Octroi/LBT will be abolished in GST Regime.
Besides there will not be any material loss of input credit on account of stock transfer of
goods from one State to another. GST will also eliminate collection and submission of various
forms such as C Forms, F Forms, etc., thus reducing compliance costs.

Retailers pay huge amount of Service Tax on many services which are net cost for the retail
business presently. In GST, taxes paid for renting of premises as well as to other service
providers would be available for set off against taxes payable on outward supply of
goods/services.

In summary, the following taxes which are cost for the business presently, would be available
for set off under GST:

a. Taxes paid on purchase of capital goods;


b. Taxes paid on purchase of non-merchandise goods such as printing and stationery,
packing materials and several other consumable items used in retail stores,
warehouses and office premises;
c. Taxes on freight amount paid for transportation of goods;
d. Taxes paid on various services used for operation and maintenance of retail stores,
warehouses and office premises;
e. Taxes paid on services used for marketing and sales promotion of goods
f. Taxes paid any other services which are used for conducting retail business.

3.6 Likely GST Rates for retail products

Four-tier GST rate structure of 5%, 12%, 18% and 28% is being considered by the Goods and
Service Tax (GST) Council. Precious Metals and Jewellery may have a special rate. On
essential goods and services, NIL rate of GST would be applicable.

The likely basket into which any goods may fall in the GST regime is summarised as under:

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S.
Product Classification (Likely) Tax rate
No.
Fresh fruits and vegetables, pulses, food grains, milk and other such
1 Nil
basic raw materials
Processed foods like breakfast cereals, processed spices, edible oil,
2 5% or 12%
essential FMCG items, etc.

3 Precious metals and Jewellery 2.00 % to 5%

4 Standard rate 18%

5 Luxury goods, Aerated Drinks, Tobacco Products, other demerit items 28%*

* Additionally, Cess up to 15% would be leviable on luxury/demerit items.

3.7 Compliance challenges in GST

a. Conditions imposed for entitlement of input credit: As per clause 16(2)(c) of GST
Bill, 2017, unless the tax charged by the supplier in his tax invoice is actually paid by him
to the Government, the buyer of the goods shall not be eligible for the input tax credit.
Retail Sector deals with large number of consumer items, which would be purchased from
several vendors. Retailer keeping track of which vendors have paid or not paid the tax
amount to the Government is practically not possible. If any vendor has not paid tax, the
Government should take appropriate action against such vendor, but the buyer of the goods
(Retailer) should not be deprived of availing input tax credit.

b. Additional document to be prepared (over and above tax invoice) for verification
by proper officer during movement of goods: Retailers issue sale invoice to customers,
using different Point of Sale (POS) System. They make home delivery of goods to
customers. Also, Retailers stock transfer the goods from their warehouse in one State to
Retail Stores located in the same State as well as in different States.
Rule 2(4) of draft Goods and Service Tax Invoice Rules prescribes that a registered taxable
person may obtain Invoice Reference Number from the GSTN Portal by uploading a taxable
invoice issued by him in Form GST INV-1 and produce the same for verification by the
authorities during movement of goods, as required under clause 68 of GST Bill, 2017.
Retailers will find difficult to comply with this provision, especially in the case of vehicle
carrying multiple home deliveries in the same vehicle. Besides there is a concern in the
Industry, whether the Government is planning to continue with road permit system in this
form in GST Regime as well.

c. GST is leviable at the time of receipt of advance payment from customers: Retail
customers may do advance booking by making partial or full payment in advance for
purchase of new products being launched in the market by reputed brands {Examples :
Apple I Phones, Samsung Galaxy Phones booked by customers in advance}. GST is
leviable at the time of receipt of such advance payments, though the actual sale of goods
will happen subsequently. In the GSTR1 Return, we need to declare each advance payment
received and tax liability thereof. Transaction ID generated in the GSTN portal against
each such advance payment needs to be kept track and in the month, when the goods are
actually sold/delivered to the customer and final invoice is prepared, we need to upload the
final invoice in the GSTN Portal along with the advance Transaction ID and claim deduction

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of tax liability for the tax already paid in the month in which advance was received. As there
will be large number of retail customers who will do such advance bookings, keeping track
of so many transaction IDs for the taxes paid on advances and adjusting against the final
invoice will be a herculean task. Retailers would prefer the present system of paying tax at
the time of actual supply of goods under a sale invoice.

4. Frequently Asked Questions

Q 1 How will the tax liability be determined on a Composite Supply?

Ans: In respect of Composite Supply comprising two or more taxable supplies, which are naturally
bundled and one of which is a principal supply, GST will be leviable at the rate applicable for
the principal supply.

Q 2 Give three examples of Composite Supply?

Ans: (i) Sale of Laptop along with Charger


(ii) Supply of Washing Machine with two years free warranty service
(iii) Transportation of passenger by air, which includes meal/snacks during journey.
(There is no option for the passenger to seek reduction in air fare on the pretext that
he
will not have meal / snacks during journey)

Q 3 How will the tax liability be determined on a Mixed Supply?

Ans: In respect of Mixed Supply comprising two or more supplies (whether or not taxable) which
are not naturally bundled and not dependent on each other, GST would be leviable at the rate
applicable for the supply which attracts the highest rate of tax.

Q 4 Give three examples of Mixed Supply?

Ans: (i) Supply of toiletry set viz. Tooth Paste, Tooth Brush, Shaving Blade / Cream, Soap,
Shampoo, Face Cream, Hair Oil and Comb bundled and sold at a combined price
(ii) Optional Tariff quoted by Hotel covering both room stay and food expenses
(iii) Detergent and Bucket sold at a one price

Q 5 Why the goods supplied on hire purchase basis be treated as supply of goods and not as
supply of service?

Ans: When title and possession have been transferred in a transaction, it shall be considered as
supply of goods. In the case of goods supplied on hire purchase basis, the possession is
transferred immediately while the title is transferred at a future date. Therefore, it will be
treated as supply of goods.

Q 6 Whether the leasing of goods for a short term is to be treated as service? Why?

Ans: In a transaction involving leasing of goods, since there is no transfer of title to the lessee, it
shall be treated as supply of service.

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Q 7 What is the treatment of bundled supply comprising one non-GST item and one GST
item e.g. a Bottle of liquor sold with a silver flask

Ans: Such a supply will be mixed supply and charged to the highest rate. However since the higher
rate could be of a non-GST item it will not be correct to charge that rate for GST goods. In
the case of liquor bottle sold along with a silver flask, it is difficult to decide what rate will be
chargeable. It appears that govt may come with a method of separating the two values.

Q 8 For determining inter-state or intra-state supply, whether the location from which tax
invoice is prepared is relevant or the location from which the goods are despatched and
place of supply (delivery) are relevant ? For example, the e-commerce operator from
his IT Server located in Bangalore may raise tax invoice on behalf of seller of goods
(located in Kerala) to a customer in Maharashtra.

Ans: GST is a levy on supply. Location of the supplier and the place of supply are relevant for
determining inter-state or intra-state supply. The location of IT platform, from which tax
invoice is prepared, is not relevant. In the above example, as the supply originates from
Kerala and delivered to a customer in Maharashtra, it is an inter-state supply. The tax invoice
will mention the Kerala address as location of the supplier and the customer address in
Maharashtra as the place of supply.

Q 9 A retailer has a scheme of issuing loyalty card to its customers. For every Rs.100 worth
goods purchased by a customer, he/she gets Rs.2 as loyalty reward. Such rewards are
credited to customers loyalty card. Customer can use the loyalty amount credited in
his/her card for making payment towards subsequent purchases made from the retailer.
In GST Regime, whether such reward amount credited to customers loyalty card need
to be treated as advance payment against customer future purchases and whether GST
liability need to be discharged by the retailer at the time of crediting reward amount to
customers loyalty card?

Ans: The reward points credited by the retailer to customers loyalty card cannot be treated as
advance amount received from customer. Therefore, no GST is leviable at the time of
crediting reward points to customers loyalty card.

Q 10 If the product is sold to a customer on EMI payment basis, whether interest component
in the EMI is includable in the value of the product for the purpose of levy of GST?
Why?

Ans: As per the provisions contained in clause 15(2) of GST Bill, 2017, interest for
delayed/deferred payment of any consideration is includable in the value of supply. Therefore,
GST is leviable on interest component in the EMI payments.

Q 11 A retailer selling washing machine takes the old washing machine from a customer. An
amount (say Rs.1000/-) is fixed for the old machine and customer makes payment for the
new machine after adjusting the amount agreed for the old machine. Sale price of new
washing machine is Rs. 25,000/-. What is the value on which the retailer need to
discharge GST liability for sale of new washing machine?

Ans: Retailer need to discharge the GST liability on Rs.25,000/-

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Q 12 Whether the individual customer whose old washing machine valued at Rs.1000/- is
liable to pay GST? Give Reason!

Ans: Since supply of old washing machine by the individual customer cannot be treated as a
Supply in the course or furtherance of his business, GST is not leviable on the value of old
washing machine.

Q 13 A retailer sells a television set to a customer along with free warranty for 2 years period.
Whether separate value need to be determined for free warranty services and GST is
payable on the same?

Ans: Supply of television along with the free warranty for 2 years period is a composite supply, in
which television is the principal supply. On the total consideration received from customer,
GST is payable at the rate applicable for the television.

Q 14 A customer who purchased a mobile handset from a retailer asks for special packaging
for gifting to someone. Retailer has not collected any amount from the customer for such
gift wrapping. Is cost of packaging material includable to the value of handset for the
purpose of levy of GST?

Ans: Since, this is a composite supply in which mobile handset is the principal supply, GST is
leviable on the total consideration received at the rate applicable to mobile handset.

Q 15 On what value GST is payable on promotional offer "Buy 2 Shirts Get 1 free Shirt",
when all the three shirts are having individual MRP?

Ans: For the two shirts purchased, GST is payable on sale price of each item. In respect of one
shirt given free, no GST is applicable, since it is a supply without consideration.

Q 16 What is the time of supply applicable with regard to addition in the value by way of
interest charged for late payment?

Ans: Time of supply is the date on which the supplier has received the interest payment

Q 17 Whether GST is leviable at the time of advances received from customers for pre-
booking of purchases like mobile handsets, cars?

Ans: Yes. GST is leviable at the time of advances received, since supply deemed to have been
completed to the extent of advance payment received.

Q 18 Is Input tax credit available to a retailer on goods and/or services received for
construction of store buildings?

Ans: On goods and/or services received for construction of store buildings, input tax credit is not
allowed. However, input tax credit is allowed on plant and machinery used in the store
premises, even if it is fixed to earth by foundation or structural support.

Q 19 Whether Input Tax Credit is available to Retailer on the following inward supplies:
(a) Office furniture
(b) Electrical fittings, electrical cables and electrical installation work
(c) DG Set
(d) Lift / elevators
(e) Insurance taken to cover Building, Plant & Machinery, Inventories
(f) Employee medical insurance/Life insurance
(g) Transportation of goods

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(h) Sponsorship services

Ans: (a) Yes


(b) Yes
(c) Yes
(d) Yes
(e) Yes
(f) Yes ((when notified by Govt)
(g) Yes
(h) Yes

Q 20 Whether a retailer can avail credit of excise duty contained in the inputs stock held as on
the appointed date?

Ans: Yes. As per the provisions contained in Sub-clause (3) of Clause 140 of CGST Bill 2017,
retailer can avail credit of excise duty contained in the inputs stock held as on the appointed
day, subject to the conditions specified therein: e.g. invoice should be less than a year old.

Q 21 A retailer has purchased capital goods under existing law on payment of excise duty.
Vendor has prepared the supply invoice and despatched the goods on 25th June 2017,
but the retailer has received the goods on 3rd July 2017. GST has come into effect from
1st July 2017. Can the retailer avail input credit of excise duty paid on such capital
goods in GST Regime?

Ans: No. Since the vendor has prepared the supply invoice and credit of excise duty paid on capital
goods is not admissible to retailer in the existing law, credit cannot be availed in the GST
Regime.

Q 22 What is the meaning of voucher and how supply of voucher is leviable to GST?

Ans: As per Clause 2(118) of the CGST Bill, 2017, Voucher means an instrument where there is
an obligation to accept it as consideration or part consideration for a supply of goods or
services or both and where the goods or services or both to be supplied or the identities of
their potential suppliers are either indicated on the instrument itself or in related
documentation, including the terms and conditions of use of such instrument.

If the supply of goods or service is identifiable at the time of issue of voucher, GST is leviable
at that time. In other cases, GST is leviable at the time of redemption of voucher.

Q 24 In GST Regime, how the goods returned by retail customer and replacements can be
handled? What is the procedure to be followed?

Ans: Credit Note can be issued for the goods returned by the Customer and replacement supply can
be made under a fresh invoice.

Q 25 A retailer receives goods from his supplier on 'consignment sale' basis. To the extent of
goods sold by him from his shop to customers, retailer will make payment to his
principal and return the unsold goods to principal within 3 months period. Whether the
onward and return movement of goods between principal and retailer need to be treated
as distinct supplies?

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Ans: In the case of Consignment Sales, the goods are dispatched by a taxable person to
consignment sales person, who is another taxable person. The consignment sales person sell
the goods to customer under his sale invoice mentioning his GST Registration Number. After
the goods are sold by him, he makes payment to his principal. He returns the unsold goods to
the principal as per the agreed terms.

In the above example, both the onward and return movement of goods between principal and
the retailer can be treated as distinct supplies. Alternatively, the principal can issue a credit
note in respect of goods returned by the retailer, as per the provisions contained in clause
34(1) of CGST Bill, 2017.

Q 26 What is the purpose of 'anti-profiteering' measure introduced by the Government and


how a retailer can comply with this provision?

Ans: As per Clause 171 of the Goods and Service Tax Bill 2017, any reduction in rate of tax on
supply of goods or services or the benefit of input tax credit granted by the Government shall
be passed on to the recipient by way of commensurate reduction in prices.
For Example, when a retailer purchases an item by paying GST at 18% and the Government
subsequently reduce the GST rate to 12%, if that item is lying in stock of the retailer on the
date of change in rate, he needs to reduce his selling price to customer to the extent of 6% of
his purchase price.

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