The Goods and Services Tax that came into effect on Saturday has got Delhi’s kirana store owners worried. GST folds all indirect taxes, from octroi to service tax, into one rate that will be consistent nation-wide. Even though most of these small grocery stores have annual turnovers of less than Rs 20 lakhs – the threshold for being included in the GST regime– owners fear that the new tax will shrink their profit margins.

The business logic of kirana stores is simple: they obtain goods from distributors at the best price they can and sell these at the maximum retail price listed on the package (which includes all taxes). Their profit margin, in plain terms, is the difference between the cost at which they buy the product and the maximum retail price.

But store owners fear that their profits will get thinner because the prices at which distributors will sell them some goods will rise with GST, even as the maximum retail price stays steady.

This means “we will have to compromise on our margins”, said Manish Baweja, a kirana store owner in South Delhi’s Lajpat Nagar, echoing the main concern of several other shopkeepers

He said the increase in his purchasing price could still be acceptable for products with high profit margins, but not for goods with smaller margins. Holding up a packet of branded basmati rice, he explained, “For instance, the distributor who deals in this product, which used to cost us Rs 70, has informed retailers that it will now cost Rs 80. In this case, the increase in cost can still be accommodated because we have been charging customers Rs 90 for the packet, despite the MRP being Rs 105. Now, we will have to charge customers Rs 100 to maintain the old per unit profit. However, that is not possible with products that offer smaller margins.”

Baweja added: “There is a lot of confusion in the market.”

A retailer in the Sriniwaspuri area made a similar point, citing a brand of snacks produced by a local manufacturer. Others said they, too, had been informed by their distributors that the prices of several products, including soft drinks, would be increased.

Volunteering for GST

Amid the uncertainty, some retailers are even considering voluntarily registering for GST, in the hope that they may be able to keep their profit margins.

Baweja explained why he thinks this may be a good idea, once again using the example of the basmati rice: “If I get my business registered under GST, it seems like I would be in a better position amid cut-throat competition among retailers. I would be able to claim GST input [the tax element involved in the retailer’s procurement cost] from the government and ultimately, I would be able to sell the packet for Rs 90 again. If I continue selling it for Rs 100, there is the risk of losing customers.”

He has not made up as his mind, though, and said, “The chartered accountant I am consulting has asked me to wait and watch for now.”

Sanjay Kumar, who owns a retail outlet in South Delhi, has already registered himself for GST. But “it is easier said than done”, he said, explaining, “For registration under GST, one has to incur many other expenses, such as setting up a [computerised] billing mechanism and paying for the services of a chartered accountant, apart from the immense paper formalities that GST requires. At this stage, it is quite difficult for small-time retailers to evaluate whether the potential cut in their existing margins is worth incurring such expenses.”

Corporate response

To establish whether the kirana store owners had genuine reason to fear changes in prices, contacted several leading companies in the fast-moving consumer goods sector. On the face of it, none said they were going to raise their prices.

Coca-Cola company’s spokesperson Arpan Basu said, “Currently there is no change in the price of products. The company is absorbing the impact of GST.”

Vivek Karve, chief financial officer for Marico Limited, the health and beauty company that manufactures the popular Parachute hair oil, said that his company will pass on the benefit of reduction in effective tax rate to its consumers “and has firmed up price reductions”. He said that the company will begin its billing to the distributors from July 4.

Packaged foods major ITC said in a written response, “Effective steps are being taken to pass on the benefits to the consumer, wherever such benefits accrue due to the recently announced GST rates.”

Hindustan Unilever, which deals in food products and personal care items among others, said, “We had been preparing for a smooth transition to GST from July 1, including getting our internal IT systems ready...Most of our distributors will be starting normal dispatch of our products shortly.”

These products may come with stickers bearing the new post-GST maximum retail price – in keeping with a government order issued on Tuesday regarding unsold inventory. The stickers, which will not overwrite the old maximum retail price, will be allowed to be used for a three-month period till September 30.