GST Likely to Benefit FMCG Industry

GST is one of the main initiatives of the Government of India to ensure an encouraging business environment.  This regime will bring several benefits for the economy, and could particularly vitalise the fast-moving consumer goods (FMCG) industry in India.

The FMCG sector of India comprises 30 per cent from personal and household care and more than 50 per cent of the food and beverage industry.

Presently, the FMCG companies set up warehouses covering every state, engaging stock transfers among them, which in turn facilitate sales of goods to distributors locally. 

The main benefit of GST would be that local and interstate supply would be on a tax neutral ground, which will provide the small start ups with a level playing field. This would lead to India emerging as single largest common market, promoting opportunities for all sizes of organizations.

Nearly 81% of all items of FMCG sector, according to the GST rate schedule are in the 18% tax bracket or below. The remaining 19% fall in the 28% tax slab.

Items of mass consumption like soaps, hair-oil, toothpastes are gathered under the slab of 18%, whereas previously these items were taxed at 22-24%. At the same time some widely used products like hair shampoo, chocolates are to be taxed at 28% under GST.

Not all FMCG companies stand to benefit from the new regime but aggregately, the sector will see a growth in the profitability and sales volumes in post GST implementation era.

Oral care major Colgate Palmolive, which presently pays an effective tax of 25-26%, is  likely to emerge as the biggest beneficiary from the GST  as the new 18% tax on toothpastes is a positive, particularly as it levels the playing field against Dabur and Patanjali, who enjoy tax benefits.

Ayurvedic products segment, which is witnessing increased focus from leading FMCG players is to be taxed at 12%, slightly higher than the prevailing rate. Dabur, which has a wide portfolio of ayurvedic products may be negatively affected due to this. Higher tax rate in the baby food and paints segment will marginally impact Nestle and Asian Paints.

GST rate structure is likely to be neutral or marginally positive for most of the FMCG majors with broad product portfolio. In case of HUL (Hindustan Unilever Limited), for instance, tax incidence has reduced for soap, toothpaste and tea, but increased for detergent, shampoo and skin care. For Godrej Consumer Products, lower tax incidence on soaps and insecticides is a positive, but higher tax rate for hair dye is a negative. 

The best interest of the consumer has been kept in mind in the GST. (Clause 171) which is the Anti-Profiteering Clause of the GST bill, provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.

So, the benefits due to GST must be passed on to the consumers by reduction in prices. Rules for the same are not specified properly and this could be a tricky aspect of GST in regards of companies to protect the profitability from this clause.