GST boost for brick-and-mortar retail expansion

Execution challenges for physical stores are expected to reduce after the implementation

The Goods and Services Tax (GST) regime will be a shot in the arm for the brick-andmortar retail industry, which has faced major competition from online e-commerce players in the past few years.

Besides the uniform tax, the execution challenges for physical stores are expected to reduce significantly after the implementation of the GST, which has brought optimism for retailers to expand aggressively.

“Today e-commerce companies get an advantage in terms of taxation,” said Kishore Biyani, chief executive officer (CEO), Future Group, which is present across all retail formats from supermarkets to fashion retail business. “The GST will create a great level-playing field and is definitely helping our new expansion plan,” he added.

There have been some changes in the dynamics for brick-and-mortar stores in the past six months. The drying up of funds for some of the e-commerce players was a positive for the physical retail industry. Then the listing success of Avenue Supermarts (DMart) boosted investors’ confidence that the brick-and-mortar model can be profitable if executed well. With the GST being implemented in the next few months, the industry looks forward to a level-playing field. “The GST is not just a tax reform, it is a whole new way of doing business,” says Krish Iyer, president & CEO, Walmart India, pointing out the current challenges in terms of inter-state transportation of goods, as it has to pass through various check posts. >

This not only affects the efficiency but also increases the transportation cost. “The GST will create a unified national market and, hence, make supply chain and the Indian retail sector more efficient,” said Iyer, whose expansion plans have got a boost with the GST.

The US major’s local arm, which operates wholesale cash-and-carry stores in India, plans to add 50 new such stores in next couple of years to its existing chain of 21. Biyani is even more enthused as he plans a major foray in physical stores.

When he set a target of growing Future Group’s revenue five times to ~1 lakh crore in financial year 202021, he did not factor in the GST. Biyani now hopes to do better than his initial target as he plans to open 10,000 neighbourhood stores instead of 4,000 that he had earlier envisaged.

Currently, e-commerce players sell from low valueadded tax (VAT) markets such as Hyderabad and Bengaluru. VAT on items such as smartphones in these markets is 5 per cent, much lower than the national average of about 12 per cent. This has led to brands such as Xiaomi and Motorola planning to expand their offline retail from the current model of selling mostly online. Also, under the new tax regime, manufactures will have to depend on wholesalers who will ultimately depend on retailers, including mom-and-pop stores to get the tax-credit based on ultimate transactions with consumers. Since the GST regime is going to have a system of giving grades to every taxpayer, including the small kirana stores, manufacturers are likely to avoid those with lower grades. This could put many small, standalone stores at a disadvantage.

“That is why more organised players will go and open shops there to be in a position to tie up with a local player or take the business over,” said Anil Talreja, partner Deloitte Haskins & Sells.

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