Internal Trade Chapter Notes | Business Studies (BST) Class 11 - Commerce PDF Download

Introduction

• Trade involves buying and selling goods or services for profit.
• Since ancient times, trade has been essential, and it has only grown in importance as new products are continually developed and made available worldwide.
• No one person or country can produce everything they need, so they specialize in what they can make best and trade the rest.
• There are two types of trade:
  1. Internal Trade - occurs within a country.
  2. External Trade - occurs between countries.
• Let's understand Internal Trade in detail. 

Internal Trade

• Internal trade refers to buying and selling goods and services within a country's borders.
• This includes purchases from local shops, markets, malls, exhibitions, or door-to-door sellers, all part of the domestic market without customs or import duties.
• The purpose is to distribute goods produced domestically for local consumption.
• Types of Internal Trade:
  1. Wholesale Trade - Involves buying goods in large quantities for resale. Wholesalers help distribute products like soap or salt across wide areas. For instance, a wholesaler might purchase large stocks of soap directly from the factory and then distribute it to various grocery stores across multiple cities.
  2. Retail Trade - Involves selling goods directly to consumers in smaller quantities, often through stores or markets. 
• Both wholesalers and retailers serve as intermediaries, ensuring that products flow smoothly from producers to end consumers. They make goods accessible across the country at affordable prices, creating a network that supports the economy and meets the needs of consumers nationwide.

Wholesale Trade

• Wholesaling involves selling goods to retailers, businesses, or institutions, rather than directly to consumers.
• Wholesalers link manufacturers and retailers, helping goods reach broad markets and managing various distribution tasks.
• They buy in bulk from producers, assume business risks, and sell smaller quantities to retailers.
• For instance, a wholesaler might buy a large shipment of electronics from a manufacturer and supply them to different retail stores.
• Wholesalers perform essential roles such as:
  1. Sorting and Packing goods
  2. Storing
  3. Transporting
  4. Promoting products
  5. Gathering market information
• They also help retailers by managing stock and often offering credit.
• Without wholesalers, manufacturers or retailers would need to take on these functions directly.

Wholesaling Process

Services of Wholesalers

Wholesalers play a key role in helping both manufacturers and retailers by efficiently distributing goods. They ensure products are available when and where needed, providing time and place utility. Here are some of their main services:

1. Services to Manufacturers

Major services offered by wholesalers to the producers of goods and services are given below:

1. Enabling Large-Scale Production: Wholesalers combine small orders from many retailers into bulk purchases, allowing producers to operate on a larger scale and gain cost efficiencies.

2. Risk Bearing: Wholesalers handle goods under their own name, storing them and taking on risks like price drops, theft, or damage, thereby protecting manufacturers from these risks.

3. Financial Support: Wholesalers often pay upfront, reducing the capital tied up for producers and sometimes even providing advance payments.

4. Market Insights: With direct retailer contact, wholesalers advise producers on customer preferences, market trends, and competition.

5. Distribution Assistance: By distributing to various retailers, wholesalers free manufacturers from complex marketing tasks and allow them to focus on production.

6. Ensuring Production Flow: Wholesalers purchase and store goods year-round, ensuring continuous production without delays.

7. Storage: Wholesalers store goods in their own facilities, reducing the storage needs for producers and providing time utility.

2. Services To Retailers

Retail Trade

• A retailer is a business that sells goods and services directly to consumers, usually in small quantities.
• Retailers purchase large quantities of products from wholesalers and offer them to final consumers for personal use.
• Retailing is the last step in the distribution process, where goods move from manufacturers or wholesalers to consumers.
• Retailers can sell products in various ways, such as in stores, over the phone, or through vending machines.
• For example, selling pens or books on buses, cosmetics through door-to-door sales, or vegetables by the roadside all count as retail selling, as long as the goods are sold to ultimate consumers.

Retailers perform several key functions, including:

• Buying products from wholesalers
• Storing goods properly
• Selling in small quantities
• Taking on business risks
• Grading products
• Collecting market information
• Extending credit to buyers
• Promoting sales through displays or special offers

Services of Retailers

Retailers provide various services to manufacturers and wholesalers,  as well as to consumers.  Let's learn about them.

1. Services to Manufacturers and Wholesalers

1. Distribution Support: Retailers help distribute products to final consumers across wide geographical areas, offering place utility.

2. Personal Selling: Retailers handle personal selling efforts, relieving producers from this task and ensuring successful product sales.

3. Enabling Large-Scale Operations: By selling goods in small quantities, retailers allow manufacturers and wholesalers to focus on large-scale operations and other business activities.

4. Market Information: Retailers gather insights on customer preferences and market trends, providing useful data for marketing decisions.

5. Promotion Assistance: Retailers participate in promotional activities like advertising, offering discounts, and running contests, which help increase product sales.

2. Services to Consumers

1. Product Availability: Retailers ensure regular availability of products, allowing consumers to purchase what they need when required.

2. New Product Information: Through displays and personal selling, retailers inform customers about new products and their features, influencing purchasing decisions.

3. Convenience in Buying: Retailers buy in bulk and sell in smaller quantities, often located near residential areas and open for extended hours, providing convenience to customers.

4. Wide Selection: Retailers stock a variety of products from different manufacturers, giving consumers a broad range of choices.

5. After-Sales Services: Retailers offer services like home delivery, spare parts, and customer support, encouraging repeat purchases.

6. Credit Facilities: Retailers sometimes provide credit to regular customers, helping them increase their consumption and improve their standard of living.

Types of Retailing Trade

Retailers in India can be categorized based on various factors such as:

1. Size of Business: Retailers may be classified as large, medium, or small depending on their scale of operations.

2. Type of Ownership: Retailers can be sole traders, partnership firms, cooperative stores, or companies, based on their ownership structure.

3. Merchandise Handled: Retailers can also be classified according to the types of goods they sell, such as speciality stores, supermarkets, or departmental stores.

4. Business Location: Retailers are classified into two main categories:

   • Itinerant Retailers: These do not have a fixed place of business and often sell goods on the move.
   • Fixed Shop Retailers: These operate from a permanent location.

Let's learn about Itinerant and Fixed Shop Retailers.

Itinerant Retailers

Itinerant retailers are traders who do not have a permanent business location. Instead, they move from street to street or location to location, seeking customers to sell their goods.

Characteristics

(a) They are small-scale traders with limited resources.
(b) They typically sell everyday consumer products like toiletries, fruits, and vegetables.
(c) Their focus is on offering convenience by delivering products directly to customers' doorsteps.
(d) Without a fixed business location, they usually store their inventory at home or elsewhere.

Common Types of Itinerant Retailers

(i) Peddlers and hawkers: Small traders who sell goods directly to customers from bicycles, handcarts, or on foot. They typically offer low-cost, non-standardized items like fruits, vegetables, snacks, and toys, and are often found in residential areas or near schools. While they provide convenience, the quality and price may vary.

(ii) Market traders: Retailers who set up shop on fixed days, such as every Saturday, selling products like fabrics or toys. They mainly serve lower-income customers with affordable, everyday goods.

(iii) Street traders (pavement vendors): These retailers operate at busy places like railway stations, selling common items such as food, stationery, and newspapers. They usually stay at the same location.

(iv) Cheap jacks: Small retailers with temporary shops in business areas. They move between localities based on demand but less frequently than hawkers. They sell consumer goods and offer services like watches and shoe repairs.

Fixed Shop Retailers

This is the most common form of retailing, where shops have a permanent establishment to sell their goods. Unlike itinerant retailers, they do not move from place to place, providing customers with a fixed location to shop.

Characteristics

(a) Fixed shop retailers typically have more resources than itinerant traders and operate on a larger scale, though their size can vary from small to large.

(b) They sell a wide range of products, including both consumer durables and non-durables.

(c) These retailers are generally viewed as more credible by customers and offer better services, such as home delivery, warranties, repairs, credit facilities, and spare parts.

Types

Fixed-shop retailers can be classified into two main types based on the scale of their operations:
(a) Small shopkeepers, and
(b) Large retailers.

Types of Retailing Trade

The various types under these two categories are described below:

Fixed Shop Small Retailers

(i) General stores: These stores are commonly found in local markets and residential areas. They offer a variety of daily-use products, such as groceries, toiletries, and stationery. Open for long hours, they often provide credit facilities to regular customers. Their success relies on the convenience of being close to customers and the rapport the store owner has with the community.

(ii) Specialty shops: These stores focus on a specific line of products, such as children's clothing, electronics, or books. Popular in urban areas, they attract customers by offering a wide selection of goods in a central location.

(iii) Street stall holders: These small vendors are usually found at busy locations, selling inexpensive items like toys, cigarettes, and drinks. They attract a floating customer base and offer convenience, though they operate on a small scale.

(iv) Second-hand goods shops: These stores specialize in selling used goods like books, clothes, furniture, or vehicles at lower prices. They cater to budget-conscious buyers and sometimes deal in antique items. These shops can vary in setup, from simple stalls to more established stores.

Fixed Shop Small Retailers

Fixed Shop — Large Stores

1. Departmental Stores

• A departmental store is a large retail establishment that offers a wide range of products, categorized into distinct departments to meet nearly every customer’s need under one roof.
• Each department specializes in a specific product category, such as toiletries, groceries, electronics, clothing, and furniture.
• In India, though the concept of departmental stores is still emerging, notable examples include Akberally in Mumbai and Spencers in Chennai.

Some key features of departmental stores are:

1. Varied services: Modern stores often offer additional services like restaurants, travel information bureaus, phone booths, and restrooms, catering to higher-income customers.
2. Strategic location: These stores are usually situated in central, high-traffic areas to attract a wide range of customers.
3. Large-scale management: They typically operate as joint-stock companies with a board of directors, led by a managing director, with separate department managers overseeing different areas.
4. Retailing and warehousing: Departmental stores combine retail and warehousing functions. They directly purchase from manufacturers and operate their own warehouses, reducing the need for middlemen.
5. Centralized purchasing: While sales are decentralized across various departments, purchasing decisions are made centrally by the store’s purchasing department.

Advantages of Departmental Stores

1. Attract a large customer base: Central locations bring in many customers throughout the day.
2. Convenience: A wide range of products in one place saves time and effort.
3. Additional services: Home delivery, credit facilities, and amenities like restaurants and restrooms enhance customer experience.
4. Economical large-scale operations: Bulk buying helps reduce costs.
5. Effective promotions: Significant budgets for advertising boost sales.

Limitations of Departmental Stores

1. Lack of personal attention: Large-scale operations make individual customer service difficult.
2. High operating costs: Services and amenities lead to higher prices, affecting affordability.
3. Risk of loss: Changes in customer preferences or trends can result in unsold stock.
4. Inconvenient location: Not ideal for quick, urgent purchases.

Departmental Stores

2. Chain Stores or Multiple Shops

 Chain stores or multiple shops are networks of retail shops that are owned and operated by manufacturers or intermediaries.

Characteristics

1. Centralized Procurement: Merchandise is centrally procured and distributed to different stores, ensuring consistency and cost savings.
2. Standardization: All stores follow identical merchandising strategies, products, and displays.
3. Branch Management: Each store is managed by a branch manager, reporting daily to the head office.
4. Cash Sales: Sales are made on a cash basis, with proceeds deposited directly into the bank.
5. Supervision: Inspectors ensure quality of service and adherence to policies.

Examples in India: Bata, Raymonds, and Nirula's.

Advantages of Chain Stores

1. Economies of Scale: Centralized buying reduces costs through bulk purchasing.
2. Elimination of Middlemen: Direct selling to consumers cuts out intermediaries, reducing costs.
3. No Bad Debts: Cash-only transactions prevent losses from unpaid debts.
4. Stock Transfer: Unsold goods can be transferred to locations with higher demand, reducing dead stock.
5. Risk Diffusion: Losses from one store can be offset by profits in others.
6. Lower Operating Costs: Centralized management and purchasing streamline operations.
7. Flexibility: Non-profitable stores can be easily closed or relocated without significant loss to the organization.

Limitations of Chain Stores

1. Limited Product Range: Manufacturer-owned chain stores often offer only their own products, limiting choice for consumers.
2. Lack of Initiative: Store managers follow head office instructions, stifling creativity and responsiveness.
3. Impersonal Service: Standardized operations may lead to a lack of personalized customer interaction.
4. Demand Fluctuations: Rapid changes in customer demand can lead to unsold stock, causing losses.

Differences Between Departmental Stores and Multiple Shops

Location

• Departmental Stores: Typically located at a central location to attract large crowds.
• Multiple Shops: Distributed across various locations to reach a wider customer base; a central location isn’t essential.
  

Range of Products

• Departmental Stores: Offer a wide variety of goods to meet diverse customer needs under one roof.
• Multiple Shops: Focus on a specific product range, often limited to standardized or branded goods.

Services Offered

• Departmental Stores: Provide extensive services, including garment alteration, dining options, etc.
• Multiple Shops: Limited services, mainly handling guarantees and repairs for defective items.

Pricing

• Departmental Stores: Pricing varies across departments and may include seasonal discounts.
• Multiple Shops: Fixed, uniform prices across all locations.

Class of Customers

• Departmental Stores: Typically serve higher-income customers who prioritize service over price.
• Multiple Shops: Cater to a broad range of customers, including those seeking affordable quality.

Credit Facilities

• Departmental Stores: May offer credit to regular customers.
• Multiple Shops: Operate on a cash-only basis, with no credit facilities.

Flexibility

• Departmental Stores: Can adjust the range of products offered based on demand.
• Multiple Shops: Less flexible, usually sticking to a fixed line of products.

Mail Order Houses

Mail-order houses are retail outlets that sell goods through mail, without direct interaction between buyer and seller. Sales are solicited through advertisements, catalogues, or price lists sent by mail. Customers typically pay in advance, through Value Payable Post (VPP), or by bank transfer, ensuring secure payment.

Suitable Products for Mail Order

Mail order is best for products that:

• Are standardized, portable, and easy to ship
• Have stable demand
• Are available year-round
• Face minimal competition
• Can be effectively marketed with images or descriptions

Advantages of Mail Order Houses

1. Low Capital Requirement: Minimal infrastructure keeps start-up costs low.
2. No Middlemen: Direct sales to customers eliminates intermediaries, reducing costs.
3. Reduced Bad Debt: Cash-only sales prevent credit-related losses.
4. Wide Reach: Products can be shipped nationwide.
5. Convenience: Goods are delivered directly to customers.

Limitations of Mail Order Houses

1. No Personal Contact: Limited buyer-seller interaction may lead to misunderstandings.
2. High Promotion Costs: Heavy reliance on advertising increases expenses.
3. No After-Sales Service: Customer service is limited due to physical distance.
4. No Credit: Cash-only policy may deter some customers.
5. Delayed Delivery: Orders processed via mail take time to fulfil.
6. Potential for Fraud: Unscrupulous sellers may make false claims.
7. Reliance on Postal Services: Effective postal services are critical; remote areas may lack access.

Consumer Cooperative Store

Consumer cooperative stores are retail organizations owned and operated by consumers aiming to provide goods at affordable prices by eliminating middlemen. They buy goods in bulk from manufacturers or wholesalers, allowing members access to quality products at reduced costs. Profits are reinvested in bonuses, reserves, and community benefits.

Consumer Cooperative Store

Structure and Formation

• Formed by at least 10 members who establish a voluntary association.
• Registered under the Cooperative Societies Act.
• Capital is raised by issuing shares to members, with limited liability.
• Management is democratic, with each member having one vote, ensuring equal participation.

Advantages of Consumer Cooperative Stores

1. Easy to Form: Requires only ten people to establish.
2. Limited Liability: Members’ financial responsibility is restricted to their capital investment.
3. Democratic Management: Members elect a committee to manage the store, ensuring fair control.
4. Lower Prices: Direct purchases eliminate middlemen, reducing prices.
5. Cash Sales: Primarily operates on a cash basis, reducing the need for working capital.
6. Convenient Location: Stores are often located in accessible public places.

Limitations of Consumer Cooperative Stores

1. Lack of Initiative: Volunteers manage the stores, which can reduce motivation and efficiency.
2. Shortage of Funds: Capital is limited to members’ contributions, hindering growth.
3. Irregular Patronage: Members may not consistently shop at the store, impacting profitability.
4. Limited Business Expertise: Managers may lack professional training, affecting operations.

Super Markets

A supermarket is a large retail store that offers a wide variety of consumer goods under one roof, focusing on self-service and low prices. Supermarkets primarily sell food items, groceries, household goods, clothing, electronic appliances, and medicines. They are usually located in central shopping areas and operate on a self-service model where customers pick products, pay at the checkout, and handle delivery themselves.

Key Characteristics

1. Variety of Goods: Carries a complete line of groceries and other commonly used consumer products.
2. One-Stop Shopping: Customers can buy multiple types of goods under one roof.
3. Self-Service: Customers select their items without assistance, reducing staffing costs.
4. Lower Prices: Bulk purchasing, low operational costs, and narrow profit margins help keep prices competitive.
5. Cash Sales Only: Products are sold on a cash basis without credit options.
6. Central Location: Situated in accessible areas to attract high customer traffic.

Supermarket Structure

Advantages of Super Markets 

1. Convenient and Economical: Offers a wide range of products at low costs in one location, saving time and money for shoppers.
2. Easily Accessible: Central locations make supermarkets convenient for people from surrounding areas.
3. Wide Product Selection: Availability of various goods in different styles, colours, and brands for easier selection.
4. No Bad Debts: Cash-based sales eliminate issues of unpaid debts.
5. Economies of Scale: Large-scale operations help lower costs, making products affordable.

Limitations of Super Markets 

1. No Credit Options: Only cash sales, which can limit shoppers who rely on credit facilities.
2. Limited Personal Attention: Self-service setup means customers don’t receive individual assistance, which is essential for some products.
3. Risk of Product Mishandling: Self-service can lead to goods being handled carelessly by some customers, raising maintenance costs.
4. High Overhead Costs: Operational expenses are high, which can affect price competitiveness.
5. Significant Investment Needed: Requires substantial capital to establish and sustain, making it feasible primarily in large urban areas.

Vending Machines

Vending machines represent a modern and automated method of selling goods, utilizing coin or card-operated systems for quick purchases. These machines are commonly used to dispense low-priced, high-turnover products such as hot drinks, soft drinks, snacks, platform tickets, newspapers, and more recently, money via Automated Teller Machines (ATMs) in banking. Vending machines are particularly popular in urban areas and provide a 24/7 service for immediate, convenient access to specific goods.

Key Characteristics

1. Automated Operation: Customers insert coins or cards to make purchases without needing store staff.
2. Variety of Goods: Ideal for pre-packed, uniform products like drinks, snacks, and tickets.
3. ATM Banking Revolution: ATMs have transformed banking by enabling cash withdrawals without needing to visit a bank branch.

Advantages of Vending Machines

1. Convenient and Time-Saving: Offers easy, round-the-clock access to items in locations like malls, train stations, and offices.
2. Reduced Staffing Needs: Operates without sales personnel, lowering staffing costs.
3. Efficient for High-Turnover Items: Ideal for products that sell quickly, like snacks or tickets.

Limitations of Vending Machines

1. High Installation and Maintenance Costs: Initial setup and ongoing repair expenses can be substantial.
2. No Product Examination: Customers cannot inspect or return products, limiting choice and satisfaction.
3. Special Packaging Requirements: Products must be pre-packed to fit machine specifications, requiring additional packaging efforts.

Despite certain limitations, vending machines are a growing part of the retail landscape, especially for items with consistent demand and low unit prices. They reflect an efficient, accessible option for both businesses and consumers, with promising future potential as urbanization and demand for quick-service options increase.

Goods and Services Tax

The Goods and Services Tax (GST) was introduced by the Government of India on July 1, 2017, with the goal of creating a unified market under the principle of “One Nation, One Tax.” GST is considered a major reform in India's tax system, as it streamlines the tax structure and enhances the ease of doing business by removing multiple indirect taxes.

Characteristics of GST

1. Destination-Based Tax: GST is a single tax on the supply of goods and services, collected at each stage of production, from the manufacturer to the consumer.
2. Unified Tax Structure: GST has replaced 17 indirect taxes and 23 cesses previously imposed by Central and State governments, simplifying the tax process and reducing the need for multiple returns.
3. Dual System: GST is divided into Central GST (CGST) and State GST (SGST), with each government imposing taxes at different stages of value addition.

Benefits of GST

1. Ease of Business: Reduces the tax burden by eliminating the tax-on-tax effect and simplifies compliance by requiring fewer returns.
2. Improved Tax Administration: The streamlined structure enhances tax collection and mitigates tax evasion.
3. Consumer Benefits: The input tax credit mechanism at each stage of the value chain prevents double taxation, potentially reducing prices for consumers.
4. Supports Sustainable Development: Effective taxation under GST provides revenue that can be allocated toward social objectives.

How GST Works

• Input Tax Credit (ITC): Each seller in the supply chain can claim credit for the GST paid on their inputs, reducing the cascading effect of taxes.
• Destination-Based Tax: GST is charged at each stage of value addition, with the last dealer passing on the tax to the consumer.

GST is a transformative tax reform aimed at integrating India’s economy, reducing prices, and benefiting consumers by avoiding cascading taxes and simplifying the tax structure. It encourages accountability in tax collection and promotes sustainable growth by effectively channeling public funds into social and economic development initiatives.

Key Features of GST

1. Nationwide Applicability: GST covers the entire territorial spread of India, creating a unified market.
2. Tax on Supply: GST is levied on the supply of goods or services, moving away from the traditional focus on the manufacture or sale of goods and services.
3. Destination-Based Tax: It follows a destination-based taxation principle, meaning tax is collected where goods or services are consumed, not where they are produced.
4. Import Treatment: Imports are considered inter-State supplies and subject to Integrated GST (IGST) along with applicable customs duties.
5. Three Tax Components:
   1. Central GST (CGST) and State GST (SGST) for intra-State transactions.
   2. IGST for inter-State transactions. Rates for these are set through a mutual agreement by the GST Council, comprising members from both Central and State governments.
6. Four Tax Slabs: GST has four primary tax rates – 5%, 12%, 18%, and 28% – applied across various goods and services.
7. Zero-Rated Exports and SEZ Supplies: Exports and supplies to Special Economic Zones (SEZ) are exempt from GST, and classified as zero-rated.
8. Multiple Payment Methods: Tax payments can be made through various modes, including Internet banking, debit/credit cards, NEFT, and RTGS for added taxpayer convenience.

Role of Commerce and Industry Associations in Promotion of Internal Trade

Business and industrial associations, such as ASSOCHAM, CII, and FICCI, aim to support and advocate for trade and industry, acting as the guardians of national commerce. Their roles include the following key areas to facilitate a strong internal trade environment:

1. Interstate Movement of Goods: These associations work on policies for smooth interstate trade, focusing on vehicle registration, transport policies, and infrastructure projects like the Golden Quadrilateral Corridor to enhance connectivity across India.

2. Octroi and Local Levies: Local taxes like octroi are crucial for regional revenue, but can hinder trade. Associations collaborate with local governments to ensure these taxes don't overly obstruct transportation and trade flow.

3. Harmonizing Sales Tax and VAT: Associations advocate for a uniform sales tax structure across states, pushing for Value Added Tax (VAT) to replace traditional sales tax and eliminate the cascading tax effect, simplifying the tax system.

4. Marketing of Agro Products: Chambers support agricultural trade by streamlining subsidies and marketing policies to aid farmers and related cooperatives, ensuring better prices and distribution for agricultural products.

5. Weights, Measures, and Brand Protection: Associations work to enforce consumer protection laws, particularly on accurate weights and measures and brand duplication prevention, safeguarding both consumer rights and legitimate businesses.

6. Excise Duty: As excise taxes are significant government revenue sources, associations collaborate to align excise policies with industry interests, ensuring fair pricing and smoother tax processes.

7. Promoting Infrastructure Development: Chambers push for investment in roads, ports, railways, and energy to bolster trade and make logistics more efficient and cost-effective.

8. Labour Legislation: Associations engage with the government on labour policies to make them more flexible, fostering higher production and employment, and ensuring industries operate smoothly.

Through these initiatives, business and industrial associations play a central role in creating a business-friendly environment, supporting economic growth, market harmonization, and the well-being of industries and consumers alike.