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GST Impact: A mixed bag for the FMCG sector

  • Highlights

  • With GST, taxes on FMCG have remained mostly the same

  • GST has reduced logistics and input costs while improving the supply-chain

  • Transitional value and frequently changing tax rates are reducing profits

As compared to the erstwhile tax regime, taxes on most FMCG (Fast-Moving Consumer Goods) products have either lowered or remained the same. These include non-durable goods like packaged food, over-the-counter drugs, sanitary products etc. Earlier, indirect taxes like VAT were applicable to FMCG goods. Overall, the introduction of GST (Goods and Services Tax) has reduced the tax burden of these manufacturers. However, the GST has also impacted the FMCG sector with anti-profiteering issues. In fact, GST been a mixed bag for the FMCG sector. Here’s how:

The positives

- Reduced logistics cost
Due to the subsumption of taxes like VAT, Entry tax and OCTROI, logistics tax has decreased significantly. Post GST, logistics cost for FMCG goods reduced by more than 2%, and for some products, by 5%. The reduction in logistics cost will increase the demand for these goods, as they are generally ‘fast-selling goods’. This especially applies to non-branded products.

- Greater efficiency in supply-chain management
Earlier, manufacturers were required to open a warehouse in every state, to

trade in those areas. However, with the introduction of GST, this is no longer necessary. Thus, the supply chain has become more efficient for FMCG goods.

Additional Read: What is Supply Chain Management (SCM)

- An uptick in consumption
With reduced indirect and logistics cost, the final production of FMCG goods has now become cheaper. This has benefitted both, manufacturers as well as end consumers. This has especially helped manufacturers in rural areas. Thus, there is a rise in demand for these goods.

GST Calculator for Wholesalers and Retailers

The Negatives

- Transitional credits
Earlier, FMCG companies had to set up units, in different states to trade within them. The companies also received area-based exemptions on taxes. Therefore, FMCG companies had invested heavily in these states to open factories. However, with the introduction of GST, there’s a bit of ambiguity regarding tax refunds to these players.

Additional Read:: GST advantages and disadvantages

- Frequently changing rates
In November 2017, tax rejigs on 200 FMCG goods were announced by the GST Council. The lack of clarity in tax treatment has led to immense confusion for various FMCG goods. For example, there is obscurity on applicable taxes on a ‘buy one –get one free’ product. It is also unclear how FMCG companies must apply promotional schemes.

- Anti-profiteering issues
The transitional credits and frequent changes in tax rates have given rise to anti-profiteering issues in the FMCG sector. Hence, companies have not been able to pass the benefits to customers directly. In addition, there continues to be ambiguity on how to compute and determine the manufacturer’s profit.

Given the positives and negatives of GST, it is a mixed bag for the FMCG sector. Increased clarity on taxes on promotional activities, constant tax rates and precise computation of tax and profit can make GST even more useful for the growth of the FMCG sector.

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