Implementation of GST regime in India is one of the huge transformations, apart from demonetisation, that the country has seen in centuries. GST has become a major contributor towards the Indian economy and has had an impact on both the common man as well as business entrepreneurs. The new tax regime has made the market go up in the shortest time by boosting the fast-moving consumer goods (FMCG) industry and bringing in different benefits to the economy.
Fast-moving consumer goods are popularly known as consumer-packaged goods. It is the fourth largest sector of the Indian economy which has witnessed the change that GST has made. FMCG is also one of the fastest growing sectors of the economy. The sector consists of more than 50% of food and beverage industry and around 30% of personal and household care thereby including the entire urban as well as rural parts of India.
Under the pre-GST regime, the distribution cost of the FMCG sector accounted for 2 to 7% of the annual turnover for the companies that are manufacturing such goods. Let us understand the GST impact on the FMCG sector and what are the changes that it has brought along.
The post GST tax rate for the FMCG industry is capped at 18 to 20 percent. All the major players in the industry have welcomed GST with open arms. However, few firms in the sector are adversely affected by the tax rate charged on their products.
FMCG companies had to set up warehouses that covered every state and facilitate the sale of goods to distributors locally. These warehouses were set up usually in the states where the effective tax was low. With the implementation of GST in the country, now the FMCG companies can set up their warehouses wherever they want without any difficulty.
GST is proving to be beneficial for the FMCG sector as the industries are saving a fair amount of logistic expenses. Earlier, during the pre-GST regime, the distribution cost on the FMCG sector was charged at 2 to 7 percent, which has now been reduced to only 1.5 percent after the GST implementation. The companies are experiencing huge impact as there are changes seen such as cost reduction due to the payment of tax, smooth supply chain management, CST removal and claiming ITC under the GST regime. This result will lead to cheaper consumer goods.
Some products from the FMCG sector, like aerated drinks, have been given the highest tax slab rate of 28 percent under GST along with an additional tax of 12 percent. Leading beverage companies have stated that the effective tax rate of 40 percent, under GST, on sweetened aerated water as well as flavoured water is against the policy of maintaining parity with the previous weighted average tax which was below 40 percent.
Also, some of the most commonly used products are being placed under the highest tax slab rate of 28 percent under GST. Higher tax rates for shampoos and detergents is impacting the firms negatively as these products are mass consumption items and are used daily.
Most of the other premium category products, like health supplements, liquid soap and skin care, have been put under the highest tax slab rate of 28 percent. However, these products will not be impacting the FMCG sector negatively as they were paying taxes at the similar rate even during the pre-GST regime.
Along with the premium category products, Ayurvedic players, such as Dabur, are upset with the ayurvedic products being charged GST at the rate of 12 percent. The leading companies manufacturing ayurvedic products had expected that the government would set such products at a lower tax slab rate, given the fact that the government was heavily promoting traditional Indian medicines.
The overall structure of GST rate, for the FMCG sector, has most likely seen a mixed impact. GST has had an impact on every phase of the business operations. Hence, it requires being approached wholly by the business for a smoother transition.