No cheaper food, drinks, clothes, or tobacco after tax rate cut; CPGs to use benefits to fuel growth

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Published: September 23, 2019 4:11:44 PM

Consumer goods companies will not likely cut prices of daily use items such as food, drinks, clothes, or tobacco after Nirmala Sitharaman’s hefty corporate tax rate cut.

FMCG SlowdownAfter Nirmala Sitharaman’s corporate tax reform gift, it was being widely speculated that the consumer packaging goods companies would not retain the benefit.

Consumer goods companies will not likely cut prices of daily use items such as food, drinks, clothes, makeup, or tobacco after Finance Minister Nirmala Sitharaman’s hefty corporate tax rate cut and will instead use the benefit to ensure their growth or drive premiumisation. After Nirmala Sitharaman’s corporate tax reform gift, it was being widely speculated that the consumer packaging goods companies would not retain the benefit and pass it on to the customers to spur demand. However, according to a recent Kotak Institutional Equities report, whatever reinvestment that the companies will make will essentially be towards growth or fuelling accelerated premiumization.

“To assume otherwise (i.e. companies sharing anything more than a small portion of the benefits with the consumers or trade) would fly in the face of historical evidence in the sector. We see no reason to challenge history,” the report co-authored by Rohit Chordia, Jaykumar Doshi and Aniket Sethi said. While the major portion of the benefits will be retained by the companies, a few price reductions here and there are expected as such moves do not likely dilute absolute operating profits.

FMCG and consumer packaged goods companies have been reeling under a slowdown of lately as demand from the rural India remained subdued. While this has meant slower sales for these companies, the companies could have spurred demand via rate cut benefit. Several FMCG companies are also mulling on rate cuts in the upcoming festive season to boost sales.

Previously, the finance minister announced slashing the corporate tax rate for domestic firms. “The effective tax rate for companies will be 25.17% inclusive of surcharges and cess. There will not be any minimum alternate tax,” she said last Friday. Earlier, these companies were taxed at marginal and effective tax rates of 30% and 35%, respectively. However, the new tax rates are conditional.

The government added that companies which decide to move to the new marginal and effective tax rate would have to let go of any exemption that they are currently availing. “We expect companies such as Dabur, Marico, GCPL and Bajaj Consumers to opt for status quo, ie continuing to avail exemptions while staying at a marginal tax rate of 30% given that their current ETR is below 25.6%, anyway,” the report added.

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