One of the best ways to make that happen is to provide the right incentives to MSME sellers to go online
The pandemic is bad news for the Indian retailer. The Confederation of All India Traders (CAIT) estimated when the lockdown was imposed. In addition, the body also estimated that at least 20% of Indian retailers were likely to wind up their business in the coming months. Because of restrictions in movement, it is hard for small sellers to maintain demand, and the only possible solution to that is to move online. Doing so at a national scale will expand the consumer base and better equip retailers to handle logistics.
While moving online is a widely accepted solution for sellers, it comes at a monetary and compliance cost. If small retailers are to survive the pandemic, costs to moving online will need to be mitigated. Currently, instead of an incentive to move online, the pre-COVID tax regime has inadvertently installed exist entry barriers which act as a deterrent.
It is hard to make an estimate of exactly how many micro and small retailers exist in India. Manish Sinha, of Dun and Bradsteet makes an excellent estimate when he argues that, “For every 100 companies in India, there are more than 95 micro enterprises, four small-to-medium businesses, and less than one large company”.
Unfortunately, because the distribution of retailers skews to small and micro sellers, the pandemic is going to affect them the most. Aswath Damodaran, Professor of Finance at NYU Stern School of Business, made the argument that the businesses that are going to suffer the most are going to be ones with high fixed costs and low variable costs. That is prophetic for the small Indian retailer.
Small, offline businesses are going to find it particularly hard to cope. With little to no earnings, and staff to pay, layoffs are going to be imminent. For a gauge on how big the impact is going to be, according to Sandeep Soni, “Over 95 per cent non-food retailers have shut their shops during the lockdown while revenues are expected to shrink 40 per cent in the following six months”. Especially when aversion to free movement is going to impact identification of customers to fulfil demand for brick and mortar stores. Making inventory available online will ensure a wider reach of customers, and may positively impact demand.
As of right now, there exists a comprehensive GST framework that reduces the tax and compliance burden for small offline sellers. Should a company be bringing in less than ₹40 lakh in revenue, they do not need to pay GST. This does not apply to Kerala and Telangana, where the ceiling is ₹ 20 lakh. Further, if you are an offline seller, say a kirana store selling locally within your city or state and bringing in a turnover of less than Rs 1.5 crore, you get to pay a reduced GST at 1% of turnover. However, in case you are a seller on an e-commerce platform, no such provisions are provided.
These category of sellers selling locally at a reduced rate do not have the option to sell online either. Regardless of the size of the turnover or sales within same state or city, they will be required to register and pay GST and comply with all the GST formalities.
In a world where the whole sector is suffering from a sharp average demand drop and bills to pay, there is going to be greater incentive amongst sellers to move online. Doing so will allow small retailers to make goods and services available to customers nationwide. Hence, the need of the hour is to reduce the compliance overhead to make it an easier transition for the sector.
In addition to paying GST and income taxes on sales, earlier this year the government introduced a 1% TDS levy on e-commerce transactions, on the gross amount of sale or service, expected to be implemented beginning 1st October, 2020. This is in addition to the 1% TCS under GST which is already levied on e-commerce transactions. A 2% upfront tax deduction from sales has a huge working capital impact for small businesses who already earn small margins on their business and do not have access to cheap working capital loans. The likely alternative here is for MSMEs to turn to expensive loans, which are more likely to end up in higher rates in default. Further, the process of claiming tax refunds from the government could take anywhere between 1-2 years.
Importantly, the GST registration, the absence of a tax relief parity with online sellers, and a 2% upfront tax deduction make it difficult for online sellers even in a normal world. After all, the Indian community of small sellers is large and diverse. The dynamics are far more challenging in a post-COVID reality.
The logical alternative to so many of these small retailers is to move online. And arguably one of the best ways to make that happen is to provide the right incentives to MSME sellers, for instance a reduced tax rate and simplification of compliance as outlined above.
In addition, there is a strong argument to consider temporary (or potentially permanent) removal of the tax disparities between selling offline and online – simply replicating the offline thresholds for GST registration and composition scheme and removing 2% upfront tax withholding for sellers upto ₹40 lakhs can help a lot to create opportunities for offline sellers to go online. Not only is doing to pivotal to achieve the Government’s vision of achieving a $1 trillion digital economy by 2025, but it will also give lakhs of sellers a chance to be a part of the Digital India movement through being able to sell online, while potentially acting as a catalyst to prepare the sector for a future where we might have to live with the virus.
To deal with the consequences of a post-COVID world, policy needs to be proactive, and not reactive. Helping small sellers come online might be the first and most important step in achieving that transition.