GST: Boon or Bane for FMCG Sector in India?
The efficiency of GST will likely create benefits for the sector, but only if credits are passed on in the value chain.
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.
Hence, the sector is likely to see a significant impact once the Goods and Services Tax (GST) Bill is passed as the companies set up warehouses across the states in a bid to have a more tax efficient system.
In an interview to CNBC-TV18's Menaka Doshi, Harishanker Subramaniam, National Leader – Indirect Tax, EY, shares his views on how the GST will actually pan out for the sector.
Below is the verbatim transcript of the interview to CNBC-TV18.
Q: What benefits do you foresee once the GST is passed?
Subramaniam: Even from the fast-moving consumer goods (FMCG) industry, 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 a FMCG industry.
The second fact is the fact that FMCG industry today has a network design which is also entirely driven by the concept of stock transfers and then sale through depots.
Q: Multiple warehouses?
Subramaniam: Multiple warehouses will not consolidate nearly because there is a tax change, because the 2 percent origin tax of central sales tax (CST) will go away assuming 1 percent origin tax does not exist in the design of GST. Then there could also be an opportunity to see whether they can consolidate warehouses, but still keeping in mind, the speed to market. So, those are two things that I directly see as a benefit from the FMCG.
Q: What about negatives? For instance many FMCG companies manufacture in states that give them several exemptions.
Subramaniam: Very important question. In FMCG industry, there are several procurements which are done from fiscal units which are in places like Himachal and Uttaranchal where there is a complete excise benefit. What will be the treatment of those units tomorrow? Will they move on to a refund mechanism and hence what could be the trapped cash flow, working capital requirements and so on and so forth, net of the input credit that may potentially lie?
Second is, today in the value added tax (VAT) regime, many of the processed foods which are in the FMCG regime are in the lower tax bracket of 4-5 percent as an example. Tomorrow, the question is whether we will go for a two rate structure or a single rate structure, in my personal view, practically and politically, it appears it will be a two rate structure. Somewhere even this CA report has alluded to it. Then even in such a situation, the lower rate is 12. So, optically, from a fiscal regime manufacturer of no excise, a lower rate of 4-5 percent to a rate of 12. What really happens? Is that something which is going to bring down the prices or what happens to the prices is a question that needs to be looked at by each of those FMCG manufacturers.
Q: How do the two square off? The advantages and the disadvantages? Are you suggesting that FMCG companies will end up with a lower tax burden or a higher tax burden?
Subramaniam: So, form a point of view of efficiency on the cascading side, it definitely, if the law pans out the way it is, with the way it is expected to there will be those efficiencies which will come on the input side, from a point of view of removal of cascading. How much of that removal of efficiency cascading and hence efficiency is offset by rates is something that will have to be seen because if the rates are also in the lower rate of say 12 percent basket, it could be possible that the efficiencies will flow through the value chain. Some of them are at the higher rate of 18 percent, then that is where the problems are.
And also on the input side, for a processed food, there are raw materials which are non-processed, agri-produced raw material which today, may be exempt. What happens to them tomorrow? Will they continue to remain exempt. All these will be needed to be factored to really come to an understanding as to what happens to a particular product whether the price falls, remains constant or marginally goes up.