New GST rule on higher tax for exchange offers leaves retailers in a fix

Tax will be calculated on price of the new product and discounted amount will not be considered

Retailers and traders dealing with consumer durables items like televisions, refrigerators, air conditioners, washing machines and mobile handsets, among other things, are in a fix. If the government has its way, the much-awaited goods and services tax (GST) that kicks in later in the year will make exchange schemes for all major consumer electronics and home appliances unattractive. This could seriously jeopardise the business model that most dealers currently follow.

According to the new draft norms, released by the government on Sunday, in case of consumers buying any item under exchange offers the tax calculation will not factor in the discount that they receive under such a scheme. For example, if someone wishes to buy a new television set with a price tag of Rs 40,000 and he is availing of an exchange offer where his old TV is valued at Rs 10,000, he would have paid Rs 30,000 to the retailer under the current rules, and VAT would be applicable on the cash component. But under GST, tax would be levied on the actual cost -- Rs 40,000.

However, once GST comes into effect, the tax will be calculated on Rs 40,000 (price of the new product) and the discounted amount will not be considered. Since, proposed rates for consumer durable items under GST is higher than VAT, put simply, this will lead to price rise and either the dealers would have to bear the excess tax burden or they would have to pass it on to the customers.

Exchange schemes cover almost a fifth or 20 per cent of the products sold in the consumer electronics and home appliances space in the country. While manufacturers run such schemes on occasions, it is the retailers and dealers, who mostly conduct them. According to companies such as Videocon and Whirlpool, among others, company run exchange offers constitute meagre one percent of their sales.

“Since, the dealers get better prices for these second-hand products from third party buyers of consumer durable items, than what they get from manufacturers like us, they usually do not sell these items to us. So, it is on them now how do they channelize the excess cost, arising out of increased tax under GST”, a senior executive from a major consumer durable manufacturer said.

Thus, while most of these consumer durable manufacturers are less affected by this new norms. It is the dealers and retail chains and e-commerce players who may land into trouble.