Impact of GST on FMCG Sector: The 3 lakh crore Fast Moving Consumer Goods (FMCG) industry in India is one of the major contributor to the state exchequer in excess of Rs 40,000 Crores. Major categories being food & beverage followed by household and personal care. As per the present tax regime, FMCG Sector has to pay many taxes like VAT, Service Tax, Excise duty, Central Sales Tax etc. Once the new GST act will be implemented it will cover all the above taxes under one single point of tax in form of GST. Major categories being food & beverage followed by household and personal care.
FMCG is one of the fastest growing sectors among all the sectors in the Indian economy The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods. Hence, the sector is likely to see a significant impact once the Goods and Services Tax (GST) act is applicable in the country.
Impact of GST on FMCG Sector
Present Tax Structure in FMCG Sector:
As per the current tax regime, FMCG has to pay many taxes like VAT, Service Tax, Excise duty, Central Sales Tax. Once the GST law will be implemented it will cover all the above taxes under one single point of tax in form of GST. The current tax rate for the FMCG industry including all the taxes is around 22-24%. GST might be implemented with the expected rate of 18-20 %. It would be welcomed by all the major players in the FMCG industry. No input credit was available for certain taxes like CST, CVD and SAD under the current tax regime. Whereas under GST, there would be input credit available for all the GST payments made in the course of business.
GST rate on FMCG goods
“The GST rates decided for the major FMCG products are lower compared to their current tax rates. Tax rates of common use products such as hair oil, toothpaste and soaps have been set at 18 per cent, which is below the current effective tax rates applicable in most of the states.”
GST@ Nil Rate
Milk, Egg, Curd, Paneer, Wheat, Rice, Oats Fresh Vegetables
Branded Paneer, Honey, Frozen Vegetables, Fried Areca Nuts,
Butter, Ghee, Cheese, Dry Fruits etc…
Basic food products such as rice, milk, wheat and fresh vegetables have been kept under the NIL rate or 0% Rate which is in line with the expectation from the FMCG experts. Paneer branded and sold like mother dairy paneer or Nestle Paneer and Frozen vegetables have been kept under the 5% rate list which would be largely neutral as the current rates are around 3-4%.
Impact of GST on FMCG:
- REDUCTION IN LOGISTICS COST: FMCG sector would also benefit from GST in the form of saving considerable amount of expenses on logistics. Distribution cost of the FMCG sector currently amounts to 2-7% of total cost, which is expected to drop to 1.5% after implementation of GST. Due to the smoother supply chain management, payment of tax, claiming input credit, removal of CST under the GST regime there will be cost reduction in terms of transportation and storage of goods. It is expected that the reduction in cost and taxes would make the consumer goods cheaper.
- STOCK TRANSFERS: Under present taxation structure , a registered manufacturer making a stock transfer of excisable goods, should pay excise duty on 100% +10% of cost of production and under VAT, after furnishing Form F, stock transfers between two branches of company are not taxable.. Under GST, levy of tax when stock transfer between two branches/depots stock transfers is taxable in the following two cases:
- Intrastate stock transfer: Only when an entity has more than one registration in one state.
- Inter State Stock transfer: Transfer between two entities located in different states is taxable. The taxability of stock transfers under GST will have an impact on cash flow. This is because, tax is paid on the date of stock transfer, and ITC is effectively used when stock is liquidated by the receiving branch. Hence, under GST, for businesses engaged in stock transfers, especially in case of FMCG goods, the need of additional working capital arises due to tax instances. This will be a challenge for SMEs who operate with thin working capital.
- WAREHOUSING: A lot of FMCG companies set up their warehouses in states like Himachal Pradesh/Uttaranchal as they enjoy a lot of tax holidays/benefits/exemptions under the current tax regime. It is still not clear as to whether all the tax holidays/benefits/exemptions would exist under the GST law once it it is implemented Major FMCG companies like Nestle, ITC, Hindustan Unilever, Dabur and Cadbury are anxious as the non migration of Tax holidays / exemptions provided in current law could hurt the costing of the products of the company.
- TAXABILITY OF FREE SUPPLIES: Taxability of Free Supplies Supply of goods between persons without consideration is deemed to be a ‘supply’. Accordingly, stock transfer of promotion materials/ free samples will be subject to GST. Subsequent supply of the said promotion materials to stockiest/end customers will also attract GST. Under the present regime, free supplies are not subject to VAT. Hence, promotion expenses of FMCG companies will increase under the GST regime.
- Warehousing will gain market as manufacturer will be more interest in directly selling from to warehouses rather than transferring to various outlets.
- Stock transfer between two branches/depots will be taxable.
- More working capital requirements.
- Reduction in logistic cost.
- Good may be cheaper.
- No distinction between free samples and gifts made in course or furtherance of business.
- Company could generate substantial savings in logistics and distribution cost.
- Food companies see increase in effective tax as many companies enjoy concessional rate of excise.