Impact of Goods and Services Tax on The FMCG Sector

Dinesh Kaushal, CFO, VI-John Group
The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India post its passage in the Parliament (Rajya Sabha on 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than 50 percent of state legislatures. The Government of India is committed to replacing all the indirect taxes levied on goods and services by the Centre and States and implement GST by April 2017.

It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system. The fast-moving consumer good (FMCG) sector of India comprises more than 50 percent of the food and beverage industry and another 30 percent from personal and household care, thereby spanning the entire rural and urban parts of the country. Reports suggest the sector contributes a significant USD 6.5 billion in direct and indirect taxes.

5 major impact of GST on the FMCG industry:

• The FMCG sector is likely to see a significant impact as the companies set up warehouses across the states in a bid to have a more tax efficient system.

• GST would result in reducing the overall tax burden on products and services, thereby propelling demand.

• This will potentially boost exports with reduced costs of manufactured goods and services

• There will be a transparent taxation for the consumers

• The tax base will be comprehensive, as virtually all goods and services will be taxable, with minimum exemptions.

Looking at these benefits, it is safe to say that GST has hailed as the most powerful tax reform that India has seen where it aims to do away with the multiple-tax regime on goods and services and bring them under one rate. GST will alter the present system of production-based taxation to a consumption-based one. While manufactured consumer goods will become cheaper as the incidence of excise duty and VAT will come down from 25-26 percent at present, the cost of services would, by and large, go up from the present 15 percent levels. The sheer efficiency of goods and services tax (GST), if the design is such that the credits do not stick to the business and are passed on in the value chain, there will be benefits even from an efficiency perspective for an FMCG industry. Furthermore, the FMCG industry today has a network design which is also entirely driven by the concept of stock transfers and then sale through depots and hence the FMCG sector can see this as a boon to the industry.