GST India: Impact 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.

GST Rate:

GST standard rate at 18% would be lower in comparison to existing effective rate of >26% resulting from 12.5% excise and VAT (at 12 to 14.5% on top of excise). However many of the agricultural processed products enjoying VAT exemption or lower bracket (4-5%) if included under standard rate a higher tax incidence will result. Even the lower rate of GST for merit goods at 12% will be higher than prevailing rates. Carbonated beverages are however likely to be taxed at de-merit rate of 40% in GST.

Business Process:

The most visible impact of GST would be on the warehousing strategy of FMCG companies. Distribution costs account from 2 to 7% of turnover for FMCG companies. Currently FMCG companies establish warehouses in each state (with the tax consideration to avoid CST on interstate sales) and do stock transfers to them. Subsequently goods are sold to distributors locally. The decision on warehouse is based on tax consideration rather than market proximity or transport considerations. Under GST as local and interstate supply would be tax neutral with India emerging as single largest common market, location of warehouses needs to be reconsidered. Savings to the tune of 1.5% of sales is expected as a result of warehouse rejig. A level playing field would be created in favor of small startups in the business of delivery of organic products.

As any supply (sale or stock transfer) would be treated taxable under GST, it could lead to increased requirement of working capital and cash flow getting blocked (till refund claims are settled). Thus more working capital would be required.

Many manufacturers have setup their units in areas having tax holidays or incentives (Himachal, Uttaranchal etc.) which may not be available post GST. FMCG manufacturers using imported raw materials will have to rethink the strategy as imports would attract IGST and make them less attractive vis-à-vis local products, although full credit is available.

FMCG distributors and retailers would also be able to setoff input credit from services (transport, rent etc.) against their GST liability which was hitherto not possible.

(Views expressed are strictly personal)