GST Impacts FMCG Firms

The new Goods and Services Tax (GST) regime will bring several benefits for the economy, and could particularly vitalise the Fast-Moving Consumer Goods (FMCG) industry.

Apart from driving supply chain efficiencies, bringing untaxed players into the tax net—a large section of the industry still operates in the unorganised segment— will level the playing field for the larger, established players in the industry.
However, the GST rate structure shows that not all FMCG companies stand to benefit from the new regime.

GST beneficiaries:

The rates for various FMCG segments have mostly been along expected lines. Items of mass consumption—toothpaste, soaps, hair oil—have been put under the 18% tax slab, significantly lower than the 22-24% tax rate they have been paying. This is in accordance with the government’s stance of keeping tax rates low for mass consumption products. In fact, the GST rate schedule indicates that nearly 81% of all items are in the 18% tax bracket or below. The remaining 19% fall in the 28% tax slab.

Products to be taxed at lower rate:

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The FMCG companies, whose tax incidence has come down under the GST regime, are likely to pass it on to the consumers in the form of lower prices. “With the anti-profiteering clause in place, companies would be required to pass on the benefit of tax rates to the consumer in the form of lower prices,” says Sanjay Manyal, Analyst, ICICI Securities.

Lower prices could potentially support volume growth for certain products, particularly in the rural segment. “We believe it could result in a faster consumption shift from unbranded to branded products, spurring volume growth for FMCG companies. Simultaneously, it will also bring operational efficiency with rationalisation of supply chain by removing bottlenecks,” .

Adversely impacted firms :

Surprisingly, some of the widely consumed products have been placed under the highest tax slab of 28%—slightly higher than the rate levied earlier. “Higher tax rate in paints and possibly baby food will marginally impact Asian Paints and Nestle,” says the Axis Capital report. Higher tax rate for detergents and shampoo is a real dampener since these are daily-use, mass consumption items. Manufacturers will have to pass on the higher tax incidence to consumers in the form of higher prices of these goods.

However, it will not have much impact on the sale volumes, say analysts. Most of the items belonging to the premium category have been put under the highest tax slab of 28%. These include health supplements, skin care, aerated drinks, liquid soap, among other goods. But this is not going to have a particularly negative impact on manufacturers as they had been paying similar taxes earlier. The increase, in some cases, is only marginal.

For most other FMCG majors, the GST rate structure is likely to be neutral or marginally positive, as their broad portfolios would see a mixed impact. In case of HUL, 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.

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