Kite Industry Insights: FMCG
Understanding the sector-level impact of GST
With an emphasis on the interdisciplinary, Kite Spotlight is excited to share news related to economic shifts affecting businesses in India and beyond. India is undergoing major macroeconomic changes, which make for a dynamic — and sometimes hard to understand — economic landscape. We’re thrilled to kick off this series of articles with an analysis of the Goods and Services Tax (GST) scheme on the Fast Moving Consumer Goods (FMCG) sector.
While the FMCG sector is in a unique position, given its particular impact on consumers, we recognize that all businesses — regardless of size, industry and geography — have the ability to convert GST and other macro-level shifts into positive forces for their businesses if the right opportunity arises. With this in mind, Kite is developing intuitive products to assist companies with (among other things) GST and input tax credit compliance to turn India’s dynamic economy into a more positive force. If you’re interested in learning more about Kite’s work, feel free to contact us at people@kitecash.in.
–Kite HQ
The FMCG sector is the fourth largest sector in the Indian economy, with a total market size in excess of USD 13.1 billion. It is expected to reach USD 103.7 billion by 2020.
What is FMCG?
Fast Moving Consumer Goods (FMCG) are consumer packaged goods. There are three main segments in this sector — food and beverages (19% sector share), healthcare (31%) and personal care (50%).
Items in this category include all consumables such as chocolates, instant coffee, shampoos, soaps, aerated beverages that people buy at regular intervals. Think of the food section in a supermarket — apart from the groceries/pulses and meat sections — and you will get an idea of the sheer variety of FMCG goods available!
FMCG products are an integral part of daily life. Being the fastest growing sector in the Indian economy, any changes that impact the FMCG industry affect the lives of Indians from every background.
How does the Goods and Services Tax (GST) impact the FMCG sector?
The easiest way to understand how GST has impacted the FMCG sector is to compare the situation before and after GST.
Before GST was implemented, the FMCG sector was required to pay a wide range of applicable duties such as excise duty, value-added tax (VAT), service tax and Central Sales Tax (CST). The total effective rate came to around 22–24%.
All these taxes have been folded under the GST scheme (apart from a few exceptions). GST rates vary for different goods, with most falling under the 12–18% category. Some items, like aerated beverages, fall under the highest 28% bracket. In general, the impact of GST on FMCG companies has been mixed.
Benefits of GST
Ease of claiming input tax credit
Input tax credit was not available for taxes like CST, Countervailing Duty (CVD) and Special Additional Duty (SAD) under the old regime. CVD & SAD were applicable on imports. Now, everything falls under the GST system. GST paid on purchases can be adjusted with GST paid on sales (the crux of input tax credit). This reduces the actual amount to tax payable to the government.
Better logistics
GST has positively affected FMCG corporations by compelling them to solve for better logistics. Companies previously maintained warehouses in almost every state to avoid CST and state entry taxes (which were applicable on the inter-state transfer of goods). These warehouses operated below their capacity, increasing operational inefficiencies.
The big FMCG players are now consolidating their supply chains into bigger warehouses — in the process, they phase out other unrequired warehouses, increasing operational efficiency. This is expected to largely reduce the distribution cost, which was roughly 2–7% of the total cost of a good before GST. Of course, this may impact how many people FMCG companies employ (albeit below market-rate “efficiencies”), and may disrupt the inflow of formal economy salaries in cities or towns where warehouses were shut down.
Reduction in rates benefits consumers
The GST council has reduced the rates of various items since the initial implementation of GST in July 2017. For example, the GST rate on condensed milk was reduced from 18% to 12% on 15th November 2017. Similarly, shampoo is now taxed at 18% instead of the earlier rate of 28%. The reduction in rates must be passed on the consumers as per the anti-profiteering policy of GST. FMCG companies therefore have looked into ways on passing on the benefits by either increasing the quantity of the item sold or by reducing prices, depending on the ease of calculations and convenience.
For example, Hindustan Unilever (HUL), has increased the weight of a Rs10 pack of Rin Powder from 125gm to 140gm while maintaining the same price. PwC commented that the consumer will benefit from this change either way (i.e. by a change in quantity or price), since the relative price (i.e. INR per gram of powder) has decreased, thus complying with anti-profiteering policies.
Drawbacks of GST
While consumers are enjoying lower prices, FMCG companies are still facing many challenges under GST.
Confusion regarding anti-profiteering provisions
One of the biggest challenges for FMCG companies are the anti-profiteering rules designed to prevent companies from making excessive profits from GST implementation. There are no clear guidelines on how to calculate compliance with these policies, or how much of the benefits of GST have to be passed on to customers.
Passing on the reduction in GST rates is easy. But the main challenge involves passing on the benefit of input tax credit. Most FMCG companies sell diverse items whose prices fluctuate from time to time, depending on the season and competition. Many of these items use the same ingredients (inputs). Calculating the amount of benefit of lesser tax to be passed on between so many products is a mammoth task. Input tax credit is generally determined on a company level and not on a product level, which makes it even more challenging.
Frequent rate changes
Frequent rate changes are impacting business processes, since companies have to spend significant time and resources to adjust rate changes and make sure that price adjustments positively affect customers.
In fact, HUL has offered to pay INR 119 crore to the government because of rate changes that came into effect in November 2017. HUL admitted that it could not pass on those rate decreases to consumers due to lack of resources and time. If a conglomerate like HUL cannot adjust to these changes, then clearly businesses with fewer resources face even greater friction as a result of rate revisions.
Confusion over earlier tax holidays
Historically, many FMCG companies have set up units in states like Himachal and Uttarakhand, which had relatively lower tax rates than other states in India. There is still no clarity on what the medium-term results are on remaining in those states. Removal of such tax holidays may increase the costs of FMCG products produced in those states, but also may encourage more inter-state supply chains and distribution systems.
Stock transfers between branches
Stock transfers between branches in the same state are also taxable under GST. Different branches are defined as “related” branches under GST and any transfer will be assumed to be a sale by the branch. This has resulted in more compliance for companies.
Conclusion
While the average consumer is meant to enjoy lower prices under GST, most FMCG companies are still facing various challenges. GST is still a relatively new tax scheme, and the government continues to announce significant changes to its structure — even seven months after its launch. If businesses and the government manage to mitigate the inconsistencies currently facing the FMCG sector through this new tax system, then ultimately both businesses and consumers alike will benefit under GST.
