Cascading taxes hurt

Updated: Jan 26 2005, 05:30am hrs
fe-ICRA Snapshot

Packaged FMCG sector turnover at $12 billion in 2003

Demographically, India is an attractive market internationally (large & growing population, increasing incomes, low penetration, growing aspirations)

Product penetration high for toilet and washing soaps and tea; medium to low for other categories

Penetration high in urban middle and higher income classes. However, households are increasingly spending incremental income on purchase of durables not FMCGs

Rural markets account for more than 50% of sector sales; but rural demand has strong linkage with agricultural production and is therefore unstable on a year on year basis

Rural markets have become areas of focus ; however, capturing demand difficult

The biggest hurdle the sector faces is cascading indirect taxes. Currently, indirect taxes constitute a third of the price consumer pays. The state Vat and Cenvat need to be integrated fast. A time-bound plan to move must be announced.
Key Issues

Industry facing low growth since late 1990s.

Large players facing increasing price competition from regional players large organised sector players have lost market share in several product categories

Price has been the key "P" in last five years as regional players launched cheaper products

Large players have responded by reducing prices /not raising prices despite rise in raw material costs; and altering the market-mix


Recent initiatives by large players seem to be in line with the evolving shape of the market showing positive results

But are likely to affect the overall financial profile of leading companies

fe Perspective

The key factor impacting consumption is affordability. Tax reduction will help but higher GDP growth is best elixir

CII suggestions

Increase abatement on toiletries with alcohol

Halve excise duty to 8% on low value cocoa-based confectionery

FICCi Wishlist

Reduce customs duty on imported LAB to 15%

Remove special excise duty of 8% on aerated soft drinks