1. GST: FMCG sector to benefit overall but specific concerns remain

GST: FMCG sector to benefit overall but specific concerns remain

Most FMCG companies will be able to generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. However, an effective tax rate of 40% on aerated beverages will increase prices by over 20%.

By: | Published: May 22, 2017 11:28 AM
The GST rates announced have triggered mixed responses from analysts and leaders within the FMCG sector, with some viewing it as positive, while many others have expressed disappointment.

The GST rates announced have triggered mixed responses from analysts and leaders within the FMCG sector, with some viewing it as positive, while many others have expressed disappointment.

Post GST implementation, most FMCG companies will be able to generate substantial savings in logistics and distribution costs as the need for multiple sales depots will be eliminated. At the moment, FMCG companies pay nearly 24-25% taxes including excise duty, VAT and entry tax. With a tax rate of 18% under GST, there could be a significant reduction of 6-7% in taxes. Improved efficiencies due to a rationalisation of warehouses and a reduction in overall taxes could generate huge saving for these companies. Most FMCG companies will also gain as a result of the shift from unorganised retail to organised retail. Major benefactors would include Hindustan Unilever, Colgate, GlaxoSmithKline, Asian Paints.

Pinakiranjan Mishra, Partner and National Leader – Retail and Consumer Products, EY India said, “The GST rate structure – mostly between the 5-18% range – for consumer goods is a welcome move and is expected to decrease costs for the consumer and drive consumption in the country. Mass consumption goods, like hair oil, soaps and toothpaste, are pegged at 18% and will see a drop in price. While white goods are expected to see a slight increase in the overall tax rate, the impact should be marginal. Overall, this is a commendable move for the consumer products sector, and will augur well for the industry.”

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However, an effective tax rate of 40% on aerated beverages and a 71-204% cess over and above the 28% tax on tobacco products would increase prices by over 20%. Beverage companies have said that the effective tax rate of 40 percent under GST was against the stated policy of maintaining parity with the existing weighted average tax, which is significantly below 40 per cent.

In a statement, the Indian Beverage Association (IBA) said: “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.”

Major impact would be on Frito-Lay, Coca-Cola India, ITC.

Dabur India CFO Lalit Malik said the new rates were marginally favourable. He said except for home care products and shampoos, which now attract 28 per cent GST tax, most FMCG products have been placed at 18 per cent or below, and this is on expected lines.

“We are disappointed with the government’s decision to levy 12 per cent GST on Ayurvedic medicines and products, which we 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,” Malik said.

Analysts have also pointed out that many important inputs required for the food processing industry such as jaggery, cereals and milk, being exempted from GST, will be beneficial for the industry.

FMCG companies have also said they are awaiting clarifications on service tax and excise exemptions before they can calculate the full impact of GST.

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