Introduction to Internal Trade

Trade, in its most fundamental sense, refers to the buying and selling of goods and services with the primary objective of earning a profit. It is a cornerstone of economic activity and has been an integral part of human civilization since its earliest days. In the modern era, the importance of trade has magnified immensely. The constant innovation and development of new products, coupled with the global infrastructure to make them available for consumption worldwide, have made trade more critical than ever.

No individual, region, or country can be entirely self-sufficient; it is impossible to produce all the goods and services required to satisfy the diverse and evolving needs of a population. This reality gives rise to the principle of specialization and exchange. Each entity—be it an individual, a firm, or a nation—focuses on producing what it is best suited to produce and then exchanges its surplus produce with others to acquire what it needs. This process of exchange is what constitutes trade.

Based on the geographical location of the buyers and sellers, trade can be broadly classified into two main categories:

1. Internal Trade: Trade that takes place within the geographical boundaries of a single country.

2. External Trade: Trade that occurs between two or more countries.

This chapter will focus in detail on the meaning, nature, and different types of internal trade. It will also explore the vital role played by intermediaries like wholesalers and retailers, and the supportive function of chambers of commerce in promoting a healthy and efficient internal trade environment.

Internal Trade

The buying and selling of goods and services that takes place within the geographical boundaries of a nation is referred to as internal trade. It is also known as domestic trade or home trade. Whether a product is purchased from a neighbourhood shop, a central market, a large departmental store, a shopping mall, a door-to-door salesperson, or an exhibition, all these transactions are examples of internal trade because the goods are bought and sold within the same country.

A key characteristic of internal trade is that no customs duty or import duty is levied on such transactions, as the goods involved are part of the country's domestic production and are intended for domestic consumption. Furthermore, payments for these transactions are generally made in the national currency, which is the legal tender of the country.

Internal trade can be classified into two broad categories:

1. Wholesale Trade: This involves the purchase and sale of goods and services in large quantities, primarily for the purpose of resale or intermediate use. The traders involved are called wholesalers.

2. Retail Trade: This involves the purchase and sale of goods in relatively small quantities, generally to the ultimate consumers for their personal use. The traders involved are called retailers.

Both wholesalers and retailers are crucial marketing intermediaries. When products need to be distributed to a large number of buyers scattered across a wide geographical area, it becomes impractical for producers to reach every consumer directly. This is where the network of wholesalers and retailers becomes essential. The ultimate aim of a well-functioning internal trade system is to ensure the smooth, speedy, and equitable distribution of goods within a nation at a reasonable cost.

Wholesale Trade

Wholesale trade refers to the buying and selling of goods and services in large quantities for the purpose of resale or intermediate use. Wholesaling is concerned with the activities of those persons or establishments which sell to retailers and other merchants, and/or to industrial, institutional, and commercial users, but who do not sell in significant amounts to the ultimate consumers. Wholesalers act as a vital link between manufacturers and retailers.

They enable producers to reach a vast number of buyers spread over a wide geographical area by serving as a bridge to the retailers. In doing so, they perform a variety of essential functions in the distribution process. Wholesalers typically take title to the goods, meaning they purchase the goods in their own name and bear the business risks associated with price fluctuations, spoilage, and obsolescence. They purchase in bulk from manufacturers and sell in smaller lots to retailers or industrial users. Their key activities include grading products, packing them into smaller, convenient lots, storage and warehousing, transportation, promotion of goods, and gathering crucial market information. If wholesalers did not exist, these essential functions would have to be performed by either the manufacturers or the retailers, both of whom may not be equipped to do so efficiently.

Services of Wholesalers

Wholesalers provide a wide range of valuable services to both manufacturers and retailers, greatly facilitating the distribution of goods and services. By making products available at a place where they are needed (place utility) and at a time when they are needed (time utility), they add significant value to the supply chain.

Services to Manufacturers

The major services offered by wholesalers to the producers of goods and services include:

• Facilitating Large-Scale Production: Wholesalers collect numerous small orders from a multitude of retailers and consolidate them into a single, large bulk order for the manufacturer. This enables producers to undertake production on a large scale and reap the benefits of economies of scale, leading to lower production costs per unit.

• Bearing Risk: Wholesalers purchase goods in their own name, take delivery, and store them in their warehouses. In this process, they bear a variety of significant risks, including the risk of a fall in prices, theft, spoilage, damage by fire, and changes in demand. This relieves the manufacturers from the burden of these risks.

• Financial Assistance: Wholesalers provide crucial financial support to manufacturers. They generally make prompt cash payments for the goods they purchase, which improves the manufacturer's cash flow. Sometimes, they even provide advance payments to producers for the bulk orders they place, effectively financing the production process.

• Expert Advice: As wholesalers are in direct contact with retailers, who are in turn in direct contact with consumers, they are in a unique position to gather valuable market intelligence. They can advise manufacturers on customer tastes and preferences, prevailing market conditions, the activities of competitors, and the specific product features preferred by buyers.

• Help in Marketing Function: Wholesalers take charge of the distribution of goods to a large number of retailers. This relieves the manufacturers from the complex and time-consuming tasks of marketing and distribution, allowing them to concentrate their efforts and resources on their core activity: production.

• Facilitating Production Continuity: Wholesalers facilitate the continuity of the production cycle throughout the year. They do this by placing regular orders and purchasing goods as and when they are produced, storing them until they are demanded by retailers. This allows manufacturers to maintain a steady production schedule without worrying about seasonal or fluctuating demand.

• Storage: Wholesalers take delivery of goods as soon as they are produced in the factory and keep them in their own godowns or warehouses. This eliminates the need for manufacturers to maintain large and expensive storage facilities for their finished products.

Services to Retailers

The important services offered by wholesalers to retailers are:

• Availability of Goods: Retailers need to offer a variety of products to their customers. Wholesalers make the products of various manufacturers readily available to retailers from a single point. This relieves retailers of the cumbersome task of sourcing and collecting goods from numerous different producers and maintaining a large inventory.

• Marketing Support: Wholesalers perform various marketing functions that directly benefit the retailers. They often undertake advertising and other sales promotion activities to create awareness and induce customers to purchase the goods, which helps retailers increase their sales.

• Grant of Credit: Wholesalers generally extend credit facilities to their regular retail customers. This enables retailers to operate their business with a relatively small amount of working capital, as they can buy goods on credit and pay the wholesaler after selling them to consumers.

• Specialised Knowledge: Wholesalers typically specialize in a particular line of products and have an in-depth understanding of the market. They pass on the benefit of this specialized knowledge to the retailers, informing them about new products, their features, quality, and prices, and advising them on matters like store layout and product display.

• Risk Sharing: Wholesalers purchase in bulk and sell in relatively small quantities to retailers. This allows retailers to purchase merchandise in smaller quantities, thereby avoiding the risks of storage, pilferage, obsolescence, and price fluctuations associated with holding large inventories.

Retail Trade

A retailer is a business enterprise that is engaged in the sale of goods and services directly to the ultimate consumers for their personal, non-business use. A retailer normally buys goods in large quantities from wholesalers and sells them in convenient small quantities to the final consumers. Retailing represents the final stage in the channel of distribution, where the ownership of goods is transferred from the hands of the manufacturer or wholesaler to the final consumer.

Retailing is, thus, that branch of business which is dedicated to selling goods and services to the ultimate consumers for their personal consumption. This can happen through various methods—in person, over the telephone, or via vending machines—and at different locations, such as in a physical store, at the customer's home, or by the roadside. Irrespective of 'how' or 'where' the products are sold, if the sale is made directly to the final consumer, it is considered retailing.

Services of Retailers

Retailers serve as the crucial final link between producers and final consumers. In this position, they provide a host of useful services to consumers, wholesalers, and manufacturers.

Services to Manufacturers and Wholesalers

The invaluable services that retailers render to wholesalers and producers include:

• Help in Distribution of Goods: A retailer's most important service is providing a ready-made network for the distribution of products. They make goods available to final consumers who may be scattered over a large geographical area, thus providing essential place utility.

• Personal Selling: For many consumer goods, some amount of personal selling effort is necessary to persuade the customer and close the sale. By undertaking these personal selling efforts, retailers relieve the producers of this activity and greatly assist in the process of actualizing the sale of their products.

• Enabling Large-Scale Operations: Retailers handle the complex and time-consuming task of making individual sales to consumers in small quantities. This frees the manufacturers and wholesalers from this trouble, enabling them to operate on a relatively large scale and concentrate on their core activities like production and bulk distribution.

• Collecting Market Information: As retailers are in direct and constant touch with the buyers, they serve as a vital source of firsthand market information regarding the tastes, preferences, and attitudes of customers. This real-time feedback is considered extremely valuable for manufacturers in making important marketing decisions, such as those related to product design, pricing, and promotion.

• Help in Promotion: Manufacturers and distributors regularly carry on various promotional activities to increase sales. Retailers actively participate in these activities, for example, by setting up product displays, distributing coupons, and explaining sales contests. Their participation is crucial for the success of these promotional efforts at the ground level.

Services to Consumers

The important services of retailers from the consumer's point of view are:

• Regular Availability of Products: The most vital service a retailer provides is maintaining a regular availability of various products from different manufacturers. This ensures that buyers can purchase products as and when they need them, without having to store them.

• New Products Information: Through effective in-store displays and their personal selling efforts, retailers provide customers with important information about the arrival, special features, and uses of new products. This plays a key role in the consumer's buying decision process.

• Convenience in Buying: Retailers buy goods in large quantities and sell them in the small quantities that are suitable for individual households. Moreover, they are normally situated very near to residential areas and often remain open for long, convenient hours. This offers immense convenience to customers.

• Wide Selection: Retailers generally stock a variety of products from different manufacturers. This enables consumers to make a choice out of a wide selection of goods, comparing quality and price under one roof.

• After-Sales Services: Retailers often provide important after-sales services such as home delivery, supply of spare parts, and attending to customer issues. This service is a crucial factor in building customer loyalty and encouraging repeat purchases.

• Provide Credit Facilities: Many retailers provide credit facilities to their regular and trusted customers. This enables consumers to increase their immediate consumption and improve their standard of living by allowing them to buy now and pay later.

Terms of Trade

The following are some of the main terms used in trade documents and contracts:

1. Cash on Delivery (COD): This refers to a type of transaction in which the payment for goods is made by the buyer at the time of their physical delivery. If the buyer is unable to make the payment when the goods are delivered, the goods are returned to the seller.

2. Free on Board (FOB) or Free on Rail (FOR): This refers to a contract between the seller and the buyer in which the seller's responsibility is to bear all expenses (like transport and insurance) up to the point of delivering the goods to a specified carrier (it may be a ship, a train, or a lorry). Once the goods are on board the carrier, the ownership and risk transfer to the buyer.

3. Cost, Insurance, and Freight (CIF): This is a price term which indicates that the price of the goods includes not only the cost of the goods but also the insurance and freight charges payable on the goods up to the specified destination port.

4. Errors and Omissions Excepted (E&OE): This is a phrase often used in trade documents like invoices and quotations to state that mistakes and things that have been forgotten or omitted should be taken into account and corrected. It is a disclaimer that frees the party issuing the document from liability for clerical errors.

Types of Retailing Trade

The world of retailing is incredibly diverse. To understand it better, retailers can be classified based on various criteria. For example, based on the 'size of business', they can be categorized into large, medium, and small retailers. Based on the 'type of ownership', they can be classified as sole proprietorships, partnership firms, cooperative stores, or companies. Another common classification is based on the 'merchandise handled', which includes speciality stores, supermarkets, and departmental stores.

However, one of the most fundamental ways to classify retailers is based on whether or not they have a fixed place of business. On this basis, there are two broad categories of retailers:

1. Itinerant Retailers

2. Fixed Shop Retailers

Both these types of retailers, with their various sub-categories, will be described in detail in the following sections.

Itinerant Retailers

Itinerant retailers are traders who do not have a fixed, permanent place of business from which to operate. They are mobile retailers who keep moving with their wares from street to street or from one locality to another in search of customers.

Characteristics

• They are small-scale traders who operate with very limited capital and resources.

• They normally deal in low-priced, high-turnover consumer products of daily use, such as fruits, vegetables, and toiletry products.

• Their key value proposition is providing greater customer service by making products available at the very doorstep of the customers.

• As they do not have a fixed business establishment, they have to keep their limited inventory of merchandise either at their home or at some other temporary place.

Some of the most common types of itinerant retailers operating in India are:

(i) Peddlers and Hawkers

Peddlers and hawkers are perhaps the oldest form of retailers and continue to be a vital part of the market. They are small producers or petty traders who carry their products on a bicycle, a hand cart, a cycle-rickshaw, or even on their heads. They move from place to place and from house to house to sell their merchandise directly at the doorstep of the customers. They generally deal in non-standardised and low-value products such as toys, vegetables, fruits, fabrics, snacks, and ice creams.

(ii) Market Traders

Market traders are small retailers who open their shops at different places on fixed days or dates. A classic example of this is the weekly markets or 'haats' that are common in rural and semi-urban areas. These traders may specialize in a particular line of merchandise, like fabrics or toys, or they may be general merchants. They primarily cater to the lower-income group of customers and deal in low-priced consumer items of daily use.

(iii) Street Traders (Pavement Vendors)

Street traders are small retailers who are commonly found at places where a huge floating population gathers, such as near railway stations, bus stands, and cinema halls. They sell consumer items of common use, such as stationery items, eatables, newspapers, and magazines. They are different from market traders in the sense that they do not change their place of business as frequently, often occupying the same pavement spot for a considerable period.

(iv) Cheap Jacks

Cheap jacks are petty retailers who set up independent shops of a temporary nature in a business locality. They keep changing their business from one locality to another, depending on the potential of the area, but their change of place is not as frequent as in the case of hawkers or market traders. They deal in a variety of consumer items and may also offer services such as the repair of watches, shoes, and buckets.

Fixed Shop Retailers

This is the most common and visible type of retailing in the marketplace. As the name suggests, these are retailers who maintain a permanent establishment or shop to sell their merchandise. They do not move from place to place to serve their customers; instead, customers come to their fixed location.

Characteristics

• Compared with itinerant retailers, they normally have greater financial resources and operate on a relatively larger scale.

• These retailers deal in a wide variety of products, including both consumer durables (like electronics) and non-durables (like groceries).

• This category of retailers enjoys greater credibility and trust in the minds of customers.

• They are in a better position to provide a range of customer services, such as home delivery, guarantees, repairs, credit facilities, and the availability of spare parts.

Types

Fixed-shop retailers can be further classified into two distinct types based on the size of their operations:

1. Small Shopkeepers

2. Large Retailers

The different types of retailers falling under these two broad categories are described below.

Fixed Shop Small Retailers

This category forms the backbone of the retail sector in India and includes the vast majority of retail establishments.

(i) General Stores

General stores, often known as 'kirana' shops, are most commonly found in local markets and residential areas. As their name indicates, these shops carry a stock of a wide variety of products required to satisfy the day-to-day needs of consumers residing in the nearby localities. Their product range typically includes grocery items, soft drinks, toiletry products, stationery, and confectionery. A key feature of these stores is their convenience; they often remain open for long hours and frequently provide informal credit facilities to their regular customers. The personal rapport between the owner and the local customers is a crucial factor in their success.

(ii) Speciality Shops

This type of retail store is increasingly popular, especially in urban areas. Instead of selling a variety of products, these retail stores specialize in the sale of a specific line of products. Examples include shops that exclusively sell children's garments, men's wear, ladies' shoes, toys and gifts, school uniforms, or consumer electronic goods. These shops are generally located in central places where they can attract a large number of customers. Their main advantage is that they offer a deep assortment and a wide choice to customers within their specific product category.

(iii) Street Stall Holders

These are small vendors who operate from semi-permanent stalls located at street crossings or other places with a heavy flow of foot traffic. They typically attract floating customers and deal mainly in goods of a cheap variety, such as hosiery products, toys, cigarettes, and soft drinks. They source their supplies from local suppliers and wholesalers and operate on a very small scale. Their main advantage is providing convenience to customers for impulse purchases.

(iv) Second-hand Goods Shops

These shops specialize in dealing in second-hand or used goods. Their product range can include items like books, clothes, automobiles, furniture, and other household goods. Generally, people with modest means purchase goods from such shops, as they are sold at significantly lower prices. However, some of these shops may also stock rare objects of historical value and antique items, which are sold at high prices to collectors and enthusiasts with a special interest in such goods.

Fixed Shop - Large Stores

These are large-scale retail establishments that operate with a large amount of capital and deal in a high volume of goods. They have become a prominent feature of the urban retail landscape.

1. Departmental Stores

A departmental store is a large retail establishment that offers a wide variety of products, which are classified and organized into well-defined departments. The aim is to satisfy practically every customer's need under one roof. Each department specializes in one kind of product. For example, a single store may have separate departments for toiletries, medicines, furniture, groceries, electronics, and clothing. The defining philosophy is to offer "all shopping under one roof." In India, examples of stores that operate on this model include Shoppers Stop, Lifestyle, and Pantaloons.

Features

• They provide a host of facilities such as restaurants, travel bureaus, restrooms, and telephone booths to offer maximum service and a complete shopping experience, primarily targeting higher-income customers.

• They are generally located at a central place in the heart of a city to cater to a large number of customers.

• Due to their large size, they are typically formed as a joint stock company and are managed professionally.

• They combine the functions of both retailing and warehousing, as they often purchase directly from manufacturers and operate their own central warehouses.

• They have centralized purchasing arrangements, where all purchases for the entire store are made by a central purchase department, while sales are decentralized across the different departments.

Advantages

• Attracts a Large Number of Customers: Their central location and wide variety of goods attract a high volume of foot traffic.

• Convenience in Buying: They offer the convenience of one-stop shopping, where customers can buy almost all their required goods from a single place.

• Attractive Services: They offer numerous services like home delivery, telephone orders, and credit facilities, which enhance the shopping experience.

• Economy of Large-Scale Operations: They benefit from the economies of scale, especially in purchasing goods in bulk, which can lead to lower costs.

• Promotion of Sales: They have the financial resources to spend considerable amounts on advertising and other promotional activities, which helps in boosting their sales.

Limitations

• Lack of Personal Attention: Due to their large scale of operations, it is very difficult to provide adequate personal attention to every customer.

• High Operating Cost: Their emphasis on providing extensive services and maintaining a prime location results in high operating costs, which often translates into higher prices for the goods.

• High Possibility of Loss: Due to high operating costs and the need to maintain a large inventory, the chances of incurring losses are high, especially if they fail to adapt to changes in customer tastes and fashion.

• Inconvenient Location: Their central location can be inconvenient for customers for the purchase of goods that are needed at short notice.

2. Chain Stores or Multiple Shops

Chain stores or multiple shops are networks of retail shops that are owned and operated by a single organization, which can be a manufacturer or an intermediary. Under this arrangement, a number of shops with a similar appearance and layout are established in different localities across the country. These shops normally deal in standardized and branded consumer products that have a rapid sales turnover. They are characterized by identical merchandising strategies, with identical products and store displays. In India, Bata shoe stores, Raymond's showrooms, and fast-food chains like McDonald's and Domino's are classic examples of this format.

Features

• These shops are strategically located in populous localities to be as close as possible to the customers' residences or workplaces.

• The procurement of merchandise for all the retail units is centralized at a head office, from where the goods are dispatched to each shop. This centralized buying leads to significant cost savings.

• Each retail shop is under the supervision of a Branch Manager who is responsible for its day-to-day management and sends daily reports on sales and stock to the head office.

• All branches are controlled by the head office, which formulates all policies and ensures their implementation.

• The prices of goods are fixed, and all sales are made on a cash basis.

Advantages

• Economies of Scale: Centralized procurement and manufacturing allow the organization to enjoy significant economies of scale.

• Elimination of Middlemen: By selling directly to consumers, these organizations can eliminate unnecessary middlemen, leading to lower costs.

• No Bad Debts: Since all sales are made on a cash basis, there are no losses on account of bad debts.

• Transfer of Goods: Goods that are not in demand in one locality can be transferred to another locality where there is demand, reducing the chances of dead stock.

• Diffusion of Risk: Losses incurred by one shop can be offset by the profits of other shops, reducing the overall risk for the organization.

• Flexibility: If a particular shop is not operating profitably, the management can decide to close it or shift it to a more promising location without affecting the overall profitability of the organization.

Limitations

• Limited Selection of Goods: Chain stores owned by manufacturers typically sell only their own products, offering customers a very limited choice. This is less of an issue for retailer-owned chains like Reliance Retail, which stock products from various manufacturers.

• Lack of Initiative: The personnel managing the shops have to strictly follow the instructions from the head office, which can stifle their initiative and creativity in satisfying local customer needs.

• Lack of Personal Touch: The standardized operations and lack of autonomy for the staff can lead to an impersonal and indifferent customer service experience.

• Difficult to Change Demand: If the demand for the specific merchandise handled by the chain store changes rapidly, the management may have to sustain huge losses due to the large stocks lying unsold at the central depot.

Difference between Departmental Stores and Multiple Shops

While both are large-scale retail establishments, they differ in several key aspects:

Mail Order Houses

Mail order houses are retail outlets that sell their merchandise through the mail. In this type of trading, there is no direct personal contact between the buyers and the sellers. Potential customers are reached through advertisements in newspapers or magazines, circulars, and catalogues sent by post. On receiving orders through the mail, the goods are dispatched to the customers through the postal service. Payment can be received in several ways, including advance payment, or more commonly, through Value Payable Post (VPP), where the goods are delivered by the postman only after the customer makes the full payment. This type of business is suitable only for goods that can be graded, standardized, easily transported, and described through pictures.

Advantages

• Limited Capital Requirement: It can be started with a relatively low amount of capital as it does not require a physical storefront.

• Elimination of Middlemen: It eliminates unnecessary middlemen, which can result in savings for both buyers and sellers.

• Absence of Bad Debt: As credit facilities are not extended, there are no chances of bad debt.

• Wide Reach: It has a wide geographical reach, as goods can be sent to any place with postal services.

• Convenience: Goods are delivered at the doorstep of the customer, offering great convenience.

Limitations

• Lack of Personal Contact: The absence of personal contact means customers cannot inspect the products before buying, and sellers cannot address their specific queries.

• High Promotion Cost: Heavy expenditure is required on advertising and promotion to reach potential customers.

• No After-Sales Service: Providing after-sales service is difficult due to the distance between the buyer and the seller.

• Delayed Delivery: The entire process of receiving and executing an order through the mail takes time.

Consumer Cooperative Store

A consumer cooperative store is a retail organization that is owned, managed, and controlled by the consumers themselves. Its primary objective is to reduce the number of middlemen and provide goods to its members at reasonable prices. These stores generally buy in large quantities directly from manufacturers or wholesalers and sell to their members. The profits earned are used to declare a bonus to the members or are allocated to reserves and welfare funds. A minimum of ten people are required to form a cooperative society, which must be registered under the Cooperative Societies Act.

Advantages

• Ease in Formation: It is relatively easy to form, with minimal legal formalities.

• Limited Liability: The liability of the members is limited to the extent of the capital they have contributed.

• Democratic Management: The store is managed democratically by an elected managing committee, with each member having one vote.

• Lower Prices: The elimination of middlemen results in lower prices for the members.

Limitations

• Lack of Initiative: As the management often works on an honorary basis, there can be a lack of motivation.

• Shortage of Funds: The capital is raised from its members, which limits the funds available for growth and expansion.

• Lack of Patronage: Members may not patronize the store regularly, affecting its operational success.

Supermarkets

A supermarket is a large-scale retailing business unit that sells a wide variety of consumer goods. Its defining features are a low-price appeal, a wide variety of products, self-service, and a heavy emphasis on merchandising. The goods traded are generally food products and other low-priced, branded, and widely used consumer items like groceries, utensils, clothes, and medicines. The customers walk into the store, pick up the goods they need from the racks, bring them to the cash counter, make the payment, and take the goods home.

Advantages

• One Roof, Low Cost: They offer a wide variety of products at low cost under one roof.

• Central Location: They are generally located in central places, making them easily accessible.

• Wide Selection: They keep a wide variety of goods, enabling better selection for the buyers.

• No Bad Debts: As sales are made on a cash basis, there are no bad debts.

Limitations

• No Credit: No credit facilities are provided to the buyers.

• No Personal Attention: The self-service model means customers do not get any personal attention.

• High Overhead Expenses: Establishing and running a supermarket requires huge investment and incurs high overhead expenses.

Vending Machines

Vending machines represent the newest revolution in retail marketing methods. These coin or card-operated machines are proving useful in selling several pre-packed, low-priced products with high turnover and uniform size, such as hot beverages, milk, soft drinks, chocolates, and newspapers. In India, the most popular and widespread application of this concept is the Automated Teller Machine (ATM) in the banking sector, which has revolutionized the way people access their money. While the initial cost and maintenance of these machines are high, and customers cannot inspect the goods before buying, their 24/7 availability makes them a promising future in retailing for certain types of consumer products.

Goods and Services Tax (GST)

Following the credo of ‘One Nation, One Tax’, the Government of India implemented the Goods and Services Tax (GST) from July 1, 2017. This is regarded as the most revolutionary tax reform in India's taxation history. The primary aim of GST is to create a unified national market, ensuring the smooth and seamless flow of goods and services across the country. It is designed to make life easier for manufacturers, producers, investors, and, ultimately, consumers.

GST is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. It has replaced a plethora of multiple indirect taxes that were previously levied by the Central and State governments. In total, GST has subsumed 17 indirect taxes (8 Central and 9 State level) and 23 cesses. This consolidation has eliminated the need for businesses to file multiple returns and undergo multiple assessments, thereby rationalizing the tax treatment of goods and services along the entire supply chain, from the producer to the consumer.

GST comprises Central GST (CGST), which is levied by the Central Government, and State GST (SGST), which is levied by the State Government, on all intra-state supplies. For inter-state supplies, Integrated GST (IGST) is levied by the Centre. A key feature of GST is the provision of an Input Tax Credit (ITC) mechanism at each stage of the value chain. This allows a supplier to offset the tax they have paid on their inputs against the tax they collect on their output. This mechanism effectively eliminates the cascading effect (tax on tax), which was a major flaw in the previous tax regime. This reduction in the overall tax burden is expected to lower the prices of commodities and benefit the final consumer.

Key Features of GST

1. Territorial Spread: The territorial spread of GST covers the whole of India, including Jammu and Kashmir.

2. Applicable on 'Supply': GST is applicable on the 'supply' of goods or services, as against the earlier concept of tax on the manufacture, sale, or provision of services.

3. Destination-Based Tax: It is based on the principle of destination-based consumption tax, meaning the tax revenue goes to the state where the goods or services are finally consumed, not the state where they are produced.

4. Tax on Imports: The import of goods and services is treated as an inter-State supply and is subject to IGST, in addition to the applicable customs duties.

5. Tax Slabs: There are four main tax slabs under GST, namely 5%, 12%, 18%, and 28%, for all goods and services. Some essential items are zero-rated.

6. Zero-Rated Supplies: Exports and supplies made to Special Economic Zones (SEZs) are zero-rated, meaning no tax is levied on them, and the exporters can claim a refund of the input taxes they have paid.

GST Council

The GST regime is governed by the GST Council, a constitutional body responsible for making recommendations on all matters related to GST. Its constitution is as follows:

• Chairperson: The Union Finance Minister of India.

• Members: The Union Minister of State (Finance) and the Finance/Taxation Minister of each State.

• Decision Making: Decisions are taken by a 75% majority, with the Centre having one-third weightage and all the States combined having two-thirds weightage.

Role of Commerce and Industry Associations in Promotion of Internal Trade

Associations of business and industrial houses, commonly known as Chambers of Commerce and Industry, are formed to promote and protect the common interests and goals of their members. In India, prominent associations like the Federation of Indian Chambers of Commerce and Industry (FICCI), the Confederation of Indian Industry (CII), and the Associated Chambers of Commerce and Industry of India (ASSOCHAM) act as the national guardians of trade, commerce, and industry.

These associations play a catalytic role in strengthening internal trade and making it a more vibrant part of the overall economic activity. They act as a crucial bridge between the industry and the government. They interact with the government at various levels—local, state, and central—to reorient or put in place policies that reduce hindrances, facilitate the interstate movement of goods, introduce transparency, and remove bureaucratic hurdles. The interventions of these chambers are mainly in the following areas:

• Interstate Movement of Goods: The Chambers help in many activities concerning the interstate movement of goods, including advocating for better surface transport policies, the construction of modern highways and roads, and streamlined registration of vehicles.

• Octroi and Other Local Levies: They engage with local governments to ensure that the imposition of local taxes like octroi does not hinder the smooth transportation of goods and harm local trade.

• Harmonisation of Tax Structure: A major role of the chambers is to interact with the government to harmonize the tax structure across different states. They played a significant role in the consensus-building process for the implementation of the Value Added Tax (VAT) and, more recently, the Goods and Services Tax (GST).

• Marketing of Agro Products: These associations play an important role in the marketing of agricultural products by interacting with concerned agencies like farming cooperatives to streamline local subsidies and marketing policies.

• Weights and Measures and Prevention of Duplication of Brands: The chambers interact with the government to formulate and strictly enforce laws related to weights and measures and the protection of brands. This helps in protecting the interests of both consumers and genuine traders.

• Excise Duty: They interact with the central government to ensure the streamlining of excise duties, which play an important role in the pricing mechanism of goods.

• Promoting Sound Infrastructure: A sound infrastructure, including roads, ports, railways, and electricity, is essential for promoting trade. The chambers actively hold discussions with government agencies to channel investments into these crucial projects.

• Labour Legislation: They constantly interact with the government on issues related to labour laws, advocating for a simple and flexible labour legislation that is conducive to running industries, maximizing production, and generating employment.

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