Cigarette-to-hotel-to-FMCG major ITC says though each of its businesses is gearing up to ensure a smooth transition to the goods and services tax (GST) regime, in the near term preparedness of the diversified conglomerate’s suppliers, service providers and trade channels remains a key factor to ensure a “seamless transition” to the new indirect tax regime with minimal disruption to operations. The country’s largest cigarette maker feels implementation of GST is expected to transform the indirect tax landscape in India, by simplifying the tax structure and facilitating the ease of doing business in a unified common market.
“This augurs well for your company and each business is gearing up to ensure a smooth transition to the new indirect tax regime and harness the supply chain and logistics efficiencies that are expected to accrue post implementation of GST,” ITC said in its latest annual report. “In the near-term, however, the preparedness of your company’s suppliers and service providers, customers, trade channels etc — especially the small and medium scale enterprises — remains a key factor to ensure a seamless transition to the GST regime with minimal disruption to operations,” the report stated.
Notably, commenting on the nation’s biggest indirect tax reform, set to come into effect from July 1, Motilal Oswal, CMD, Motilal Oswal Financial Services, on Thursday said it may disrupt the system for a few days, may be weeks or months, as people are not yet fully ready for the execution. “Inventory pile-up, reconciliation of stock-in-trade and a host of other issues may create a bottleneck for some time,” Oswal observed, adding when it comes to the long term, this new system will act as a much better taxation grid.
Though 58% of ITC’s net revenue now comes from non-cigarette segments, a major part of its pre-tax profits still come from the cigarette business. As per the schedule of rates published pursuant to the GST Council’s meeting on May 18, cigarettes are likely to be taxed at the peak rate of 28%. Additionally, a GST compensation cess, comprising a 5% ad-valorem component and a specific component based on cigarette length, is likely to be imposed. According to industry analysts, the GST Council’s move to put a cap at which cess could be levied on tobacco products is a welcome development for cigarette makers such as ITC, Godfrey Phillips and Golden Tobacco, as it provides a certainty to the tax regime for them.
Significantly, ITC has been marking an increasing presence in the non-cigarette FMCG segment, hotels, paper and agri business, with the legal cigarette industry facing continuing pressure due to the cumulative impact of steep increase in taxation and regulatory pressures. The company is also exploring the possibility of entering the healthcare space in the country by setting up multi-speciality hospitals.
The company, in its annual report, said non-cigarette FMCG business, comprising branded packaged foods, personal care products, education and stationery products, lifestyle retailing, incense sticks (agarbattis) and safety matches, has grown at an “impressive pace” over the past several years. “Today, your company’s vibrant portfolio of brands represents an annual consumer spend of nearly Rs 14,000 crore in aggregate. These brands have been built organically by your company over a relatively short period of time — a feat unparalleled in the Indian FMCG industry,” it informed.
In terms of annual consumer spend, currently brands Aashirvaad and Sunfeast are at over Rs 3,500 crore and Rs 3,000 crore, respectively. Classmate, YiPPee! and Bingo! are over Rs 1,000 crore each and Vivel, Mangaldeep and Candyman are over Rs 500 crore each. “Your company seeks to rapidly scale up the FMCG businesses leveraging its institutional strengths viz. deep consumer insight, proven brand building capability, a deep and wide distribution network, strong rural linkages and agri-commodity sourcing expertise, packaging know-how and cuisine knowledge,” it added.
Meanwhile, the conglomerate said it will seek approval from its shareholders in the 106th annual general meeting, scheduled on July 28, for additional remuneration of its non-executive chairman YC Deveshwar that includes a monthly salary of Rs 1 crore among others, taking into consideration his enlarged role. Deveshwar relinquished his executive role in February this year.