Preparing Themselves

Sure, the idea behind a unified tax regime is to vitalise all sectors and who better than the FMCG sector to know the pain of a multi-tax regime. Apart from driving supply chain efficiencies, bringing untaxed players into the tax net will eventually level the playing field for everyone doing business in the sector.

However, the GST rate structure shows that not all FMCG companies stand to benefit from the new regime. For example, in FMCG, there are several procurements done from places such as Himachal Pradesh and Uttarakhand where there is a complete excise benefit. What will be the treatment of those units once GST comes into play? Will they move on to a refund mechanism?

GST rate structure will also have an adverse impact on certain categories such as Ayurvedic products and medicines, as they are still waiting for an approval  from the government. A few firms are disappointed with the government’s decision to levy 12 per cent  GST on these products. “We are still awaiting clarifications on excise exemptions, post which we will be able to calculate the full impact. Overall, the new rates are marginally favourable,” says Lalit Malik, CFO at Dabur India.

The Indian Beverage Association (IBA), too, has expressed disappoinment over sweetened aerated water and flavoured water segment being placed in the highest tax slab rate of 28 per cent combined with an additional cess of 12 per cent. The effective tax rate of 40 per cent on these products under the GST regime is against the stated policy of maintaining parity with the existing weighted average tax, which is significantly below 40 per cent. This will impact the entire ecosystem of farmers, retailers, distributors and bottlers in India, said the IBA.

Despite such reports from a few quarters, analysts say that GST is likely to ease the cost of doing business in the FMCG sector. “Placing fruit juices under the 12 per cent tax category is a good move and provides incentive for juice manufactures to increase their capacity. Wholesalers and retailers will now be online and it will be easier to track them and service them. In terms of aerated drinks being taxed at 28 per cent, there might be some short-term pinch, but it will benefit the organised players in the long-run,” says Abhishek Singh, Director, Manpasand Beverages.

Singh says that like Manpasand Beverages, many other large FMCG players such as HUL, P&G, ITC, too, have a strong network of distributors and deals directly with retailers and thus the initial GST hiccups are unlikely to impact the business. Moreover, focusing on strengthening distribution network and realignment of supply chains are key to making businesses GST ready.

A national anti-profiteering authority will be set up for two years and will have the power to order price changes or impose penalties. There will also be a standing committee on anti-profiteering in the GST council and state screening committees. The new authority is being given the power to determine the methodology and to determine whether the reduction in the rate of tax or the benefit of input tax credits has been passed on to consumers.

Results of the GST roll out may not be visible too soon. “It will be very hard to get any sense of end-consumer demand or even relative performance between companies for the next three quarters,” says a Credit Suisse report published in June.