November 8, 2016 and July 1, 2017 stand out as landmark dates in the history of the Indian economy.
Suresh Nandlal Rohira
November 8, 2016 and July 1, 2017 stand out as landmark dates in the history of the Indian economy. These dates have witnessed two major reforms in the country, although it still remains ambiguous to figure out the actual impact.
Boost and impact
Fast moving consumer goods (FMCG) sector is one of the largest sectors in the Indian economy, and the result of the GST impact on this sector can give a fair idea as to how the new tax system is impacting other sectors as well. Under the erstwhile regime, one of the major transactions, that is, inter-state transfers were subjected to central sales tax (CST) (concessional rate of 2%), which was non-creditable and resulted in increase of cost for the company as well as for the final consumer. However, under the GST regime, the same has become a creditable component thereby reducing the effective cost. Stock transfers under GST have become taxable, which results in blockage of working capital as against the previous regime where such transfers were not taxable in all states. Further, transactions like freebies, buy one get one free, etc which were a common practice across the goods industry can get covered under the GST ambit which will lead companies to change their business processes. However, GST has given a major boost to this sector by way of increase in input tax credit, capital goods and input services as well as reduction in logistics costs due to the abolition of check posts which leads to smoother supply chain as the transit time has reduced considerably and abridged the spoilage cost.
The intention of the government appears very clear — to reduce product prices. This was also evident by the recent rate cuts decided by the GST council at its 23rd meeting. However, despite all efforts of the government, there are apprehensions that the benefit of rate cuts has not been passed on to final consumers. To verify all such claims, the government has set up a National Anti-Profiteering authority whose major duty is to determine whether any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in prices. In order to support this big reform and control inflation, the government has also made changes in other laws like customs, legal metrology, etc. Government has granted permission under the legal metrology law to affix an additional sticker or stamping for declaration of reduced MRPs to keep a check on whether benefits of the reduced rates have been passed on or not. The same was also communicated by the government to consumer goods firms and industry stakeholders of such a new price tag requirement.
Crossing the hurdles
FMCG players also faced a major hurdle as far as continuation of area based exemptions provided under the erstwhile indirect tax regime in states like J&K, Uttarakhand, Himachal Pradesh and other North Eastern states where a lot of FMCG players have their presence. Recently, a budgetary support scheme was introduced to provide benefits under the GST regime. The scheme comes as a relief to FMCG players having presence in such states. The impact of demonetisation and implementation of GST back-to-back has had a deep impact on the common man’s spending pattern. Government has portrayed GST to benefit the common man and this can be seen by the regular revision in rates of various products and services. High-end luxury goods are subject to cess in addition to high GST rates but on the other hand, GST rates on goods of basic necessities have been kept at lower rates keeping in mind the interest of the general public. However, demonetisation at the end of the last year, left people with less cash in hand thereby driving consumption to a darker side. But things appear to be stabilising gradually and a final verdict on the impact of both these landmark reforms would be adjudged in the upcoming quarters.
Writer is Partner, Grant Thornton India LLP
(With inputs from Dhaval Sachdev, associate director and Anshul Aggarwal, assistant manager, Grant Thornton India LLP)