What Does Future GST Hold For FMCG Industry

Indian government is planning to roll out the much awaited goods and services tax (GST) on July 1 after all the states came on board on Sunday (18 June) for the most ambitious tax reform in the history of modern India. It has been pegged as a game changer for India in many ways, however growth trends comparison foretell a different story altogether.

The new GST regime will bring several benefits for the economy, and could particularly vitalise the fast-moving consumer goods (FMCG) industry. Apart from driving supply chain efficiencies, bringing untaxed players into the tax net, as a large section of the industry still operates in the unorganised segment, will level the playing field for the larger, established players in the sector.

However, the GST rate structure shows that not all FMCG companies stand to benefit from the new regime.

GST Beneficiaries

The rates for various FMCG segments have mostly been along expected lines. Items of mass consumption—toothpaste, soaps, hair oil—have been put under the 18 per cent tax slab, significantly lower than the present 22-24 per cent tax rate. This is in accordance with the government’s stance of keeping tax rates low for mass consumption products. In fact, the GST rate schedule indicates that nearly 81 per cent of all items are in the 18 per cent tax bracket or below. The remaining 19 per cent fall in the 28 per cent tax slab.

The FMCG companies, whose tax incidence has come down under the GST regime, will get credit from central taxes and are likely to pass it on to the consumers in the form of lower prices. “With the anti-profiteering clause in place, companies would be required to pass on the benefit of tax rates to the consumer in the form of lower prices,” said Brijesh Verma, partner & Co-Head, GST, Kochhar & Co.

Lower prices could potentially support volume growth for certain products, particularly in the rural segment. Tax exemption provided to several critical products required for food processing—jaggery, cereals and milk— would benefit this industry. Higher tax rate for detergents and shampoo is a real dampener since these are daily-use, mass consumption items. Manufacturers will have to pass on the higher tax incidence to consumers in the form of higher prices of these goods.

GST rate structure will also have an adverse impact on certain categories of products, while they are still awaiting an approval of from the government. Expectations for home care products and shampoos that now attract 28 per cent GST, most FMCG products have been placed at 18 per cent or below levels and this is on expected lines. 

However, FMCG firms are disappointed with the government’s decision to levy 12 per cent GST on Ayurvedic medicines and products, which they feel will be adverse for the Ayurvedic medicines category and that too at a time when the government has been talking about promoting traditional Indian alternative medicine. “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, chief financial officer at Dabur India Ltd.

The Indian Beverage Association (IBA), which is an industry body, where leading companies with direct and allied interests in the non-alcoholic beverage industry have come together to form their representative body. They include Dabur India Ltd, Red Bull India Pvt Ltd, Tetra Pak India Pvt Ltd, Pearl Drinks Ltd, Bengal Beverages Ltd, Jain Irrigation Systems Ltd, Coca-Cola India and Pepsico India Holdings Pvt Ltd.

In a statement, IBA has expressed disappointed with sweetened aerated water and flavoured water 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 increase will have a negative ripple effect and hurt the entire ecosystem of farmers, retailers, distributors and bottlers in India.

This increase in tax will further limit the growth of the beverage industry,” said the statement. Moreover, the imposition of cess on non-aerated flavoured water and nutrition drinks is not in line with the stated intentions of levying cess only on aerated drinks, said IBA in a statement.

However, it expressed hope for reconsideration of the rate of cess on aerated drinks besides having a lower rate for non-sugar sweetened drinks, nutrition beverages and aerated beverages that contains fruit juice and expects a positive outcome from the government. However, analysts feel GST will bring about a lot of clarity and is likely to ease the cost of doing business, especially for 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 to cater to the rising demand from consumers. Wholesalers and retailers will now be online and it will be easier to track them and service them. Hence the system will become more transparent. In terms of aerated drinks being taxed at 28 per cent, there might be some short-term pinch, but in the long-run will benefit all the organized players of the beverage industry,” says Abhishek Singh, Director, Manpasand Beverages Ltd.

Singh says that like Manpasand Beverages Ltd., many other large FMCG players like HUL, P&G,ITC and others has a strong network of distributors and deals directly with retailers, 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. With GST in effect, companies will have to focus on logistics and re look at the procurement process subsequently. Moreover, there might be a need to train vendors and distributors with what to expect from GST roll-out.

Many retailers and a few wholesalers have already started clearance sales before the dawn of GST. Retailers have been destocking goods as presumptive credit post GST is expected to be below excise paid on most products. So in order to minimise losses, clearance sales are being held.

The main reason for businesses lessening the stock in stores or ‘down-stocking’ will be if businesses anticipate lowering of prices of goods post GST.

“It will be very hard to get any sense of end-consumer demand or even relative performance between companies for the next 3 quarters,” said Credit Suisse said in a report released on June 12.

The reason for this, as cited in the report, would be because GST would ‘mask’ real growth trends. “1Q will see down-stocking, second quarter will see up-stocking but weakness in wholesale and in third quarter the base quarter had demonetisation,” the report said.