The manufacturing industry in India has been facing a mammoth task of serving almost 14 million

retail points and the end customer – in both the rural and the urban markets. The fast-moving
consumer goods sector and durable goods sector has some of the highest demands that
manufacturers are required to meet. Furthermore, almost 92% of the retail sector falls under the
unorganized category, thus making it difficult for manufacturers to rely on solely the direct
distribution channels for catering to the needs of the market’s demands.

All these factors have one easy solution – finding solace in the wholesale market. The wholesale
market, in a supply chain of goods and services, stands as an intermediary between the retailers and
the manufacturers. Even though both parties sell the same goods and services, their behavior in the
market is what differentiates them.

Distributor’s Role –

Shares a commercial relationship with the manufacturer;

He may deal with not one but several product lines, but ensures that none of these product lines are
in competition with or conflict with each other;

Services the products to retailers, but may also service wholesalers;

He deals with providing labor support to retailers to help them become established and may also
provide services which primarily include the provision of credit to the manufacturer, but also other
services such as providing product-related information, estimation of valuation, technical support,
post-sales services;

Most distributors enter into agreements with the primary manufacturer who in turn supplies
products to only limited distributors within a particular territory;

They are usually very organized and maintain healthy margins with respect to their sales;

They share a similar equation with retailers as the equation shared with them by the manufacturer.

Wholesaler’s Role –

Rarely has any commercial or business obligations and operates on his own terms;

Receives goods in bulk from the distributor for the purpose of resale, usually in bulk to other
retailers, distributors, and even to other wholesalers;

Purchases goods at a lower cost due to purchase being in bulk;

May purchase a vast range of products and is not restricted in the purchase as long as he is making a
profit;

Mostly rural and some urban retailers prefer buying their products from distributors for the lower
cost of purchase and absence of too many terms and conditions;

Works on narrow margins and thus rarely offers credit; rarely in the business of taking back any
unsold stock or products.
Manufacturers ultimately benefit from the collaboration between retailers and wholesalers as they
can achieve their sales from markets where they are not expected to handle sales and shipping

IMPACT OF GST ON
WHOLESELLER
and wholesalers alike share a very integral role in the supply chain and it is obvious that
manufacturers cannot survive without their collaboration. Even though manufacturers have begun
to brace themselves as to what to expect with the advent of the GST, they face major concerns from
their retailers and wholesalers and whether these players are able to get up to speed to GST
compliance so that the process can function smoothly. Post the demonetization era, the wholesale
market has been wounded, however, with the coming into effect of the GST, hopefully, the market
will recover and boost growth better than ever, due to the primary reasons of transparency and
better organization.

will

We have provided a snapshot of the ways in which the wholesale market be impacted by the GST –

Impact

Details

Tax increases for wholesalers – bringing them into the tax bracket and ensuring compliance

Most wholesalers make transactions in bulk and pay cash upfront as a consideration – from both
manufacturers and distributors – albeit, with a difference in their tax liability towards each of these
market participants.

It is difficult for wholesalers to pass on the excise tax liability to the subsequent buyer in the supply
chain as most of them do not possess excise registration themselves – therefore, they are unable to
avail of any tax credit.

The primary activity of a wholesaler is to buy and sell products – however, under the current indirect
tax regime, they are also burdened with the requirements of maintaining invoices, being compliant
with several tax laws, etc. – leading them astray from their primary course of work. Additionally,
wholesalers find it difficult to maintain compliance constantly because of complex transactions and
tax structures and owing to non-registration, they are not under scrutiny. Thus their tax liability is
reduced significantly and they are able to undercut the prices prevalent in the market thereby
generating higher sales.

Under the GST regime, however, all invoices are required to mandatorily upload against the
registered GSTN portal and the invoice must also be simultaneously accepted by a buyer. Further,
since all the taxes have been subsumed into a common unified tax, the tax credit has become more
seamless and smooth across the supply chain, notwithstanding the buyer or the seller involved with
the wholesaler.

An advantage is that multiple registrations have been struck out and thus wholesalers can be
compliant with ease. The idea of tax evasion has been cordoned off completely, however despite
this, there still may be several wholesalers who try to evade the compliance route – nonetheless,
since there is a system of checks and balances under the GST and buyers and sellers have to confirm
sales and purchases, non-compliance will be unlikely in the long run.

Wholesalers will ultimately be forced to be GST compliant in order to maintain and sustain their
business relations with the other players in the supply chain.

Destocking against the shift from the indirect tax regime to the GST regime

The entire wholesale market is dependent on very low margins. Especially in the wake of
demonetization, the entire wholesale market reverted to de-stocking its inventory in order to get
higher liquidity because of the cash crunch that hit the nation.

Big names in the fast-moving consumer goods sector such as Dabur and Tata fear that the same
situation will arise once again with the GST coming into effect especially because of the fear that
retailers have instilled within themselves regarding availing of the input tax credit on the existing
stock of goods.

To give a clearer picture, retailers are registered under their respective state VAT laws under the
current indirect tax regime and are required to make VAT payments on the stock held by them as of
the date of transition. It is pertinent to note that even though the VAT has been allowed as input
credit under the GST regime, there are certain conditions imposed by the government on availing
any input tax credit on closing stock – which means that some retailers may be left out.

100% input tax credit shall be available on goods on which the excise duty has been paid and there
are invoices to ascertain the same – in case the invoices are not available then only 40% of the input
tax credit may be availed.

Tax on excise is applicable only to the wholesalers and distributors – to the retailers, such excise is
passed as an additional cost and due to this reason, retailers are usually unable to claim the entire
amount of credit, owing to an absence of information on the invoices.

Pursuant to the GST regime, this cost shall be borne by the consumer, amounting to less competitive
prices to other players thereby triggering the destocking of inventory by the retailers across the
nation (during the transition to the GST phase) and then restock their inventory post the transition
has settled.
This means that for the transition period, wholesaler demand may die down which would amount to
wholesalers undergoing the destocking exercise as well.

Finally, because of such restocking, the ultimate demand for goods is expected to be on the rise.

Direct Distribution Channels

Wholesalers, especially those linked to the provision of fast-moving consumer goods and durable
goods, have become wary of wholesale business as the GST date moves closer. The managing
director of HUL, Mr. Sanjiv Mehta was recently noted saying that the entire wholesale sector in India
would take some time to stabilize post the GST transition, leading to a downturn in the sector when
compared to direct distribution channels.

But obviously, the GST regime is expected to cause disruption in the wholesale sector such as bulk
transitions, sale for cash consideration, lack of giving credit, maintenance of liquidity, operating on
wafer-thin margins, etc.

More wholesalers shall become part of the tax bracket, increasing both cost and effort. The principal
manufacturers shall become extremely important as their role would include servicing the retailers
in urban as well as rural areas.

Manufacturers will have to further provide incentives in the form of lower costs and increased
commissions to wholesalers – nonetheless, the burden on the direct distribution channel is expected
to be lesser as distributors would have entered into agreements with manufacturers for becoming
GST compliant, investing in technology and fixed assets.

The wholesale sector thus is envisaged to becoming more expensive as opposed to direct
distribution. It is also pertinent to note that manufacturers in the fast-moving consumer goods and
durable goods sector shall begin to extend direct reach in an effort to become more cost-effective.

The GST regime could lead to an increase in outlets directly owned by the company and an increase
in distribution channels – leading to positive news for organized wholesale participants in the
market, e-commerce outlets, and cash & carry models of business that shall easily take over and
crush the unorganized sector.

Open Market policy

Most supply chain models are made keeping tax liabilities in mind as a multiplicity of taxes can lead
to greater costs especially when it comes to transactions taking place interstate. This causes
wholesalers to enter into business agreements with manufacturers and retailers on an intrastate
basis and limits them from reaching outside the state or growing their business.

Under the GST regime, a more positive boost to wholesalers is expected as firstly the multiplicity of
taxes will be struck down. This will lead to the entire nation becoming the marketplace. Further,
input tax credit availability will allow manufacturers to become more competitive both intrastate
and interstate.

Manufacturers shall have wider room for access when it comes to reaching out to distributors and
wholesalers across the country thereby leading to an expansion in the business portfolio. This helps
in the generation of sales from both the existing retailers as well as serving a higher number of
retailers within the same state.

In conclusion, the GST is expected to impact the wholesale market greatly. Even though this impact
may not be what the market expects with the first few hits, just like how demonetization was rolled
out, eventually the ecosystem will see the benefits and advantages of GST. Anyone can survive this
wave if there are ready to be in compliance with the taxation, as ultimately, such adherence will
allow all players in the market to reap benefits and achieve higher revenue and overall growth.