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Ancient system of barter can work best during recessionary times

Jan 01 2013, 19:48   |   By SME Mentor

Khyati Dharamsi

In recessionary times, exchanging good and services can come to the rescue. Here's how it's done

New year is a time for new beginnings and for entrepreneurs looking to reinvent their business or give it that extra push, here's an exciting idea - try barter.

The ancient system of barter can work best during recessionary times, when you are struggling with your cash flows. It also works well to unload inventory that is not moving and you don't need to invest time or money in marketing.

Liberty Footwear, CavinKare, Emami, OCM Woolen Mills, Luxor Writing Pens, Radisson Hotels and many media publications swear by barter deals. They offer finished goods in exchange for, say, media space or furniture, equipment, free gifts, footwear, electronic goods and a host of other products and services. The trick is to find the right fit in a prospective partner, someone who has something you need and vice-versa.

Finding The Right Partner

So, if you're looking to reward your customers with New Year gifts, then your stocked inventory can help you fetch apt mementoes. If you want to increase your visibility and the brand value of your products, you can barter products or services for media space.

Companies also use barter to tide over tough times. "The growth of bartering doubles during recessionary growth phases. Also, when cosmetics or other FMCG companies want to alter the packaging of their products, they barter their old goods," says Manoj Kumar, National Head, Sales, Tradex, a sister-concern of Chennai-based Synapse Trade Solutions.

"In the past three years, we have used barter for media space and to set up hoardings," reveals Ajoy Chawla, Vice-President and Global Business Head, Titan & Retail. Small and medium enterprises too have been turning to the ancient trade route of barter. Tanay Kumar, Creative Director, Fractal Ink Design Studio, explains, "We use barter all the time. At an event, we bargained for two stalls in return for printing and processing their stage banners etc. Earlier, we provided our services to IndiaLinks Web Hosting. In return, they provided us with a domain name and hosting services for a year."

Use A Barter Exchange

When there's potential to trade, can agents or facilitators be far behind? So, although some companies like Fractal Ink ask their own vendors whether they would accept their services instead of paying in cash, there are a host of small and medium companies that use the services of barter exchanges or facilitators such as Network4barter, Ormita, Tradex, Barter India, IBX, BBX Barter Services. There is no dearth of products on offer as the exchanges have a vast network. For instance, BBX has trans-national coverage of 10,000 clients, Network For Barter serves more than 500 companies, Tradex has a footprint of 2,500, while Barter India boasts over 1,600 customers.

Ashish Trivedi, CEO, Barter India, says, "Resorts, media, travel companies, FMCG and consumer electronic goods companies regularly use our services. So, if a hotel needs cushion covers, they can offer discount coupons for occupancy or free room nights and packages to a company providing cushions."

Pricing Bartered Goods

Usually, the value of the bartered goods is at par with the maximum retail price (MRP) but never more than that. So, it works to check the market value of the goods you are offered, to avoid receiving products whose value is lower than yours. Also, you could bag discounts on the MRP offered. "If the products are approaching their expiry date, companies offer a 10-per cent discount," says Irfan Bage, Manager, Sales and Business Development, Tradex.

How To Choose A Barter Exchange

There are barter firms that ask for a lifetime fee to act as your barter facilitator, which may not be in your best interests. To avoid frauds, look at firms that offer a per-deal or annual agreement. Always opt for established barter exchanges rather that an individual who runs an exchange because they may fold up abruptly. Make sure you check the samples physically or images of the products carefully if you're accepting online offers.

Though barter means you need not shell out cash, that's not entirely true if you're opting for the exchange route. This is because the exchange asks for 8-10 per cent of the value of the deal as commission and there's service tax to be paid.

You Have To Tell The Taxman

Before accepting such a barter deal, check the tax treatment of the goods and services in question. Ameet Patel, tax partner, Sudit K Parekh & Co, explains, "The tax treatment depends on what has been transferred. If a hotel is offering rooms, it means their stock is ready. Hence, the value of a room offered in exchange would be added to the hotel's business income. However, the value of the furniture it gets in exchange cannot be completely written off as furniture is a fixed asset. The hotel can claim depreciation on it but cannot completely write it off." But, he adds, if the same hotel is accepting food products or lawn landscaping and maintenance services in exchange for offering a room, the hotel can capitalise it.

"While it may seem that since this exchange of goods and services can be left off the books, you're mistaken. If the taxman discovers you have concealed income, you will attract a penalty," says Patel, who adds, "Alternatively, if you treat cash as king, taxation should be a minor blip."

You can send your feedback on smementor@moneycontrol.com or simply post comments below


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