GST will significantly impact India's wholesale industry in several ways: 1. More wholesalers will begin paying taxes as GST makes the tax system simpler and more transparent, incentivizing compliance. 2. There will likely be initial destocking as retailers worry about input tax credits on existing inventory, though restocking may follow. 3. Over time, direct distribution channels between manufacturers and retailers may rise at the expense of wholesalers due to the higher costs of GST compliance for wholesalers working on thin margins. 4. However, GST also opens India's markets and may reduce supply chain fragmentation driven by the previous tax system.

1. GST Impact on
Wholesale Business
Team: GSTnet.in

2. A preamble
 Before we delve further on the impact of GST on the wholesale market, it is
probably useful to understand the position of a wholesaler in the supply chain, vis-à-
vis a distributor, who too, is a middleman between the manufacturer and the
retailer. While the nature of business is pretty much the same, the behaviours are
different.
 A distributor, for instance, has a commercial relationship with the manufacturer. As
a result, while he may deal in multiple product lines, he ensures that they are non-
competing in nature. While he mostly services retailers who are his regular buyers,
he occasionally services the wholesaler as well. A distributor often is a part of the
principal manufacturer’s promotional efforts, providing manpower and cash support
to roll out schemes across their chain of retailers. He also provides a range of
services such as product information, estimates, technical support, after-sales
services, and most importantly credit to their retail customers. In a bid to safeguard
his business, he will often have agreements with the principal manufacturer, which
limit the number of distributor entities in a particular territory. All in all, a
distributor is quite organised, maintains a healthy margin, and has almost the same
equation with retailers, as manufacturers have with him.
Team: GSTnet.in

3.  A wholesaler, on the other hand, largely operates without any commercial or business
obligations. He buys in bulk – mostly from the manufacturer, occasionally from the
distributor – and resells it, again in bulk – mostly to retailers and occasionally to
distributors and other wholesalers. His bulk-buying nature allows him to bargain for
lower prices from the manufacturer. Also, he often deals in a huge range of
contrasting products, as long as it results in overall profit for him. Retailers –
especially small ones in urban and most rural ones – flock to him, because they can
get products at lower costs (thus the term, wholesale rates) and, they are not
subjected to any terms and conditions, like distributors are. However, the flip side is,
the wholesaler does not offer any credit, as he himself works on thin margins, and
mostly does not take back unsold inventory/stock. This retailer-wholesaler dynamics
allows manufacturers to achieve sales from those markets, where they are not able
to handle direct retail sales and shipments.
Team: GSTnet.in

4. GST impact on wholesale
 Having discussed how wholesalers operate, we can now start to appreciate
that not only distributors but wholesalers too, are extremely crucial cogs in
the supply chain wheel, which manufacturers cannot survive without. Thus,
while manufacturers may have started preparing to brace the impact of GST
on themselves and their direct channels – distributors and outlets, they will
also be fairly concerned about the wholesalers that they work with. With the
wholesale market on its way to recovery after being hit by the
demonetization wave last year, it remains to be seen how it will negotiate the
bigger wave of GST about to hit the shores of the Indian economy, come July
1st.
 Here are 4 ways in which, we believe, GST will transform the Indian
wholesale market –
Team: GSTnet.in

5. 1. More wholesalers paying tax
 Wholesalers, as discussed above, are mostly into bulk transactions of a wide range of products, and
immediate payments in cash. Also, they may buy both from manufacturers as well as distributors– which
entail different tax liabilities for them. Since most wholesalers do not have an excise registration, they
cannot pass on the excise tax liability to the next buyer in the chain, and the tax credit chain is broken,
pretty early on. Coupled with the fact that the tax jurisdiction in the existing taxation regime is not
transaction based – the need to maintain a neat record of invoices, that too for compliance, goes down
and more focus is given to the prime business activity of buying and selling. This has led to a scenario,
wherein most wholesalers are unable to stay compliant due to the associated complexities, leading to
reduced tax liabilities. This allows them to undercut market prices, and generate volume sales. While
this still translates into wafer-thin profits – as low as 1 percent – life is good for the typical Indian
wholesaler, as he follows a largely credit-free policy.
 Under the GST regime however, every invoice pertaining to taxable supply has to be uploaded on the
GSTN’s common portal and has to be accepted by the buyer. On top, GST subsumes most of the indirect
taxes, which leads to seamless tax credit flow across the chain, irrespective of whom the wholesaler is
buying from and selling to. Also, it no longer entails multiple registrations for multiple taxes – making it
much easier for a wholesaler to stay compliant in the coming times. Yes, there may still be those few
truant wholesalers or retailers who may choose not to abide by the compliance norms. However, the
only possibility for tax evasion will arise if every single entity in the supply chain is non-compliant –
which is highly unlikely. The rest of the compliant wholesale channel is bound to boycott business with
such entities after a while – practically forcing them to start filing proper returns in order to sustain
business relations and definitely, their business. In short, the GST era will see the large segment of
wholesalers being brought into the tax bracket.
Team: GSTnet.in

6. 2. Destocking during the transition phase
 One of the biggest challenges for the wholesale market has always been, that their business hinges
on low margins. In the wake of demonetization last year, it went through a major cash crunch, and
the most natural response to the same was to de-stock to improve their liquidity. FMCG players
such as Dabur and Tata Global Beverages have predicted a repeat of the same once GST comes in,
primarily because of the last mile i.e., the retailers fearing about the availability of input tax
credit on the existing stock.
 To begin with, retailers who are currently registered under state VAT laws would have paid VAT on
all the stock held on the transition date. Although provisions have been incorporated in the GST
Law, wherein VAT paid under the current regime will be allowed as input credit under the GST
regime – the government has imposed certain conditions for availing input tax credit on closing
stock; not all retailers may make the cut.
 Further, for goods lying with the retailers on which excise duty is paid – 100% tax credit will be
available only if the excise value is ascertainable by means of invoices, and if not, only 40% tax
credit will be available. In most of the cases, the excise tax chain stops with the first stage dealers
– wholesalers and distributors. Tax is passed on to the retailers as additional cost, which means
that most retailers will never be able to claim the full excise tax credit, as it does not appear in
their invoices at all. Ultimately post GST, they will be forced to pass on this cost to their
customers, making their prices much less competitive to other players. This is bound to trigger
most retailers across the chain to de-stock the inventory during the transition phase and
eventually re-stock again under the new GST regime. And once that happens, demand to the
wholesaler will fizzle out, leading wholesalers to de-stock as well. However, once the GST era
dawns, this could also translate into a steep rise in demand for goods as a result of a widespread
re-stocking of goods by wholesalers.
Team: GSTnet.in

7. 3. Direct channels on the rise, Wholesalers on the
wane
 As GST inches closer, post GST, the wholesale sector will take at least a quarter or more to stabilise –
which could lead to the overall contribution of wholesale coming down significantly, compared to direct
coverage.
 This is because GST will cause disruptions in the core behaviour of a wholesaler – bulk transactions;
selling purely on cash basis; not giving credits and using the same to maintain liquidity in the business;
operating on thin margins, and so on. As discussed earlier, GST will see more wholesalers stepping into the
tax bracket – which will entail not only efforts but costs as well. With their already thin margins becoming
thinner still, their sheer survival will be in question. At the same time, their survival is of extreme
importance to the principal manufacturers, who need them to service the long tail of retailers and kirana
shops in both urban and rural areas.
 However, if that needs to happen, manufacturers will need to support the sinking wholesaler by pumping
business benefits – in terms of further reduced pricing, increased commissions etc. However, the effort
required on the direct distribution channel will be much less – as most distributors, would have already
started working with the respective manufacturers and invested in the right technology to become GST
compliant – for their own sake. All this, could gradually make wholesaling a more expensive deal
compared to direct distribution, and thus most manufacturers – especially of FMCG and consumer
durables – are sure to extend their direct reach, wherever feasible, in a bid to become more cost-
effective.
 In short, while wholesale is still important, the post-GST period could see a major spike in company
owned direct outlets and more penetration of distribution channels. This will also be good news for the
more organised modern wholesale players such as e-commerce and cash & carry outlets – who will easily
trump the unorganized supply chain, cracking under the pressure of GST compliance.
Team: GSTnet.in

8. 4. India – an open market for Wholesaling
 Typically, the current indirect taxation regime in India has driven supply chain
decisions of businesses. More often than not, supply chain models have been
designed keeping in mind the tax liabilities, multiplicity of taxes and costs involved
with inter-state supplies. As a result, wholesalers tend to do business with
manufacturers within the state, and end up serving the last mile of retailers with a
limited product portfolio.
 GST is set to change that picture. To begin with, the movement of goods, in the
absence of multiple taxes like entry and octroi – will open up business at an all India
level. The seamless availability of input tax credit across state boundaries will bring
forth increased efficiencies in the supply chain, and allow manufacturers to remain
competitive outside their home states as well. While the manufacturer will gets
access to a wider base of distributors and wholesalers across the country; for the
wholesaler too, it is an advantage – he can now align with manufacturers outside his
home state, expand his product portfolio, and make the most of the additional
opportunity – to not only generate more sales from existing retailers, but serve more
retailers in the same geography.
Team: GSTnet.in

9. Conclusion
 GST will definitely transform the Indian wholesale market like never before.
While there is a fair chance that it could hit them initially in the same way as
demonetization did, the benefits of GST in the long run – coupled with their
own willingness to become tax compliant, will allow them to not only survive
but also garner more benefits in terms of revenue and overall growth.
Team: GSTnet.in