Most cosmetics, which are so far taxed at 12.5%, will come under the highest tax slab of 28% under the goods and services tax (GST). Sachin Parikh, chief finance officer, Nykaa, India’s largest online cosmetics retailer with revenue of Rs280 crore, speaks about what GST means for his company and the industry at large. Edited excerpts:
Cosmetics have come under the tax bracket of 28%. Will there be an impact on your margins?
Yes; earlier, cosmetics were taxed at 12.5%. Now it’s taxed at 28%. Therefore, margins can get impacted; so, we are working with our brand partners and they are helping us to be GST-neutral. In addition, brand partners are supporting us to cover our transition stocks.
Will it be inflationary for the market? Do you expect prices to increase?
Prices are driven by our brand partners and it really depends on their structure or sourcing/ manufacturing strategy. So, it will be a mixed bag when it comes to price increase.
How prepared are you for the transition to GST?
We are on track to be GST-ready, we shouldn’t have an issue.
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What do you mean by being on track? What does it involve?
GST involves significant changes in every aspect of the way we do our business. This is the new normal. It’s been 10-15 years of VAT (value added tax) and service tax that is going to get re-written to a new tax regime. There will be some teething issues before we get to a stable way of working. Initially, what GST-ready for anyone would mean is to ensure all basic compliance changes are done. For instance, making sure the invoice and purchase orders reflect the correct taxes and is in the right format for GST. There is still work to be done after that. But for now, our systems are being updated as per the new requirements laid out by the government.
What about from the implementation point of view? How ready are you?
We are still not there yet. We have some basic understanding of how things will function. There are some open questions that we have, which may be our consultants or the government will answer in the future. Examples of this is the excise-free zones – are they going to stay or will they go. Right now, we hear that these may not exist anymore. Is that true? Then, there are questions around certain discounts, certain product level movements. But these are not show-stoppers. These will get weeded out. It’s just a question of time. I am hoping they get resolved in 3-6 months.
What does the change mean for the business?
I don’t have an opinion on this yet; as I said, it’s a new normal. Maybe three months after implementation, I can tell you whether this new normal is a good normal or not. You know, on paper, everything looks good. But it all comes down to implementation.
What is it that is keeping you undecided from forming an opinion now?
There are two impacts here – one, is financial impact that I am still working on. The second is operational and process impact. Processes will get a little more complex. The first few months, we may spend a lot more effort to do something that may not take half as much time in the future. I can tell you for sure that the first six months will be the most inefficient when it comes to executing these compliances. Now, for instance, I am filing taxes in only three states, under GST, I will have to file taxes in multiple states and a lot more frequently. Work is going to exponentially increase for the finance and taxation team.
Wasn’t GST supposed to simplify tax filing?
It’s one tax, but filing is state by state. Every state has to know what the business is doing in their particular state.
How complex is the paperwork, can you give us some understanding?
I have 400+ vendors from whom I buy directly. These vendors have about 750 brands which we sell on our portal. In some of the cases, these brand owners didn’t even know how it’s impacting them. We had to educate our vendors and get them GST-ready. If they are not ready, we can’t do business with them. I would say around 70-80% are ready and the others will be ready soon. Most of my effort is spent in getting my vendors ready than getting ourselves ready.