Impact of GST on FMCG industry

Impact of GST on FMCG industry

If one looks as the category wise breakup of the FMCG sector the manor chunk of more than 50% is the Food and Beverage industry. Another 30% comes from personal and household care. The categorization clearly shows that the industry spans the entire country whether it is the rural population or the urban class. The multiplicity of the taxes has often dictated the company’s decision on the manufacturing location and also on distribution of goods.The FMCG sector is one of the major contributors to the exchequer as it pays US$6.5 billion in direct and indirect taxes.

Many of the FMCG companies set up units which offered tax benefits. They set up warehouses across the states in a bid to have a more tax efficient system. The very fact that they do not have to pay CST led them to carry out stock transfers to the warehouses. With the GST roll out the CST will be subsumed into GST and will have far reaching implications. However the 1% tax on interstate transfers is likely to play spoilsport, with the only solace that it will be abolished a few years down the line.

As the clear picture emerges the FMCG industry is going to take a closer look at its warehousing strategies. Many of them may be abolished, while retaining the ones that are near the major customer markets may be retained. This will save the costs for the company.

Many manufacturing units have been set up in the excise free zones. How these industries will be treated under GST is not clear as yet. The FMCG industry is lobbying hard with the government in a bid to ensure that their benefits are not diluted. These units however need to work out the methods to minimize the consequences. With the GST roll out planned in the next year the likelihood of new units getting excise exemption is ruled out.

In the current scenario the traders are not entitled for any credit other than state VAT. In the countries where GST or similar tax structure is prevalent the retailers avail of tax credits when they create infrastructure. This is likely to change for the FMCG industry with the GST implementation. Since the GST encompasses the goods and services under one fold, there will not be any distinction between manufacturers, traders and service providers with regard to taxation.

The impact on the working capital is likely to be significant for the FMCG industry. This is because of the time gap expected between the payment of GST and recovery of the tax credit. A sizeable chunk of money is expected to be blocked between the two transactions. Stock transfers do not attract tax and the VAT is paid when the sales take place. However, with the GST in place it will be payable on the stock transfer as it is a destination based tax. The realization of the tax credit will only happen when the goods are actually sold which may take a long time. A serious rethink is required on the warehousing strategy.

FMCG dependent on imports will have to keep a watch on the GST rate applicable. The GST incidence is likely to higher as compared to the CVD and SAD, thus raising the cost of raw materials.

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