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The Indian FMCG sector is the fourth largest sector in the economy with a total market size in excess of US$ 13.1 billion. Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer packaged goods. Items in this category include all consumables (other than groceries/pulses) people buy at regular intervals. FMCG is also one of the fastest growing sectors among all the sectors in the Indian economy.
As per the current tax regime, FMCG has to pay many taxes like VAT, Service Tax, Excise Duty, Central Sales Tax. Once the GST law will be implemented it will cover all the above taxes under one single point of tax in form of GST. The current tax rate for the FMCG industry including all the taxes is around 22-24%. GST might be implemented with the expected rate of 18-20 %.
It would be welcomed by all the major players in the FMCG industry. No input credit was available for certain taxes like CST, CVD, and SAD under the current tax regime. Whereas under GST, there would be input credit available for all the GST payments made in the course of business.
FMCG sector would also benefit from GST in the form of saving a considerable amount of expenses on logistics. Distribution cost of the FMCG sector currently amounts to 2-7% of total cost, which is expected to drop to 1.5% after implementation of GST.
Due to the smoother supply chain management, payment of tax, claiming input credit, removal of CST under the GST regime there will be a cost reduction in terms of transportation and storage of goods. It is expected that the reduction in cost and taxes would make the consumer goods cheaper.
Stock transfers outside the State will be subject to GST. It is unclear whether stock transfers within the State will also be subject to GST. It is to be noted that the GST framework was intended to tax only inter-State stock transfers and not intra-State stock transfers. Additionally, with respect to the valuation of stock transfers, the GST Valuation Rules provide that the value of goods shall be the transaction value.
Transaction value is the price paid or payable for the supply of goods. As stock transfers do not have a consideration, this provision cannot be implemented. In addition, GST valuation rules provide that if the transaction value is not available then the value for the good/service would be considered as the transaction value of good/service of same kind and quality.
FMCG industry was anxiously waiting for the GST rates to be announced on the different products. GST rates for all different goods or products under the FMCG the has been announced by the Indian Government. Most of the products/goods have been categorized under the tax brackets as expected by the FMCG industry experts.
Although there are few products placed under the 12% bracket which is expected to be more expensive than under current laws. We have created an infographic explaining the different products falling under the different tax brackets.
Basic food products such as milk, rice, wheat and fresh vegetables have been kept under the NIL bracket which is in line with the expectation from the FMCG experts. Paneer branded and sold like mother dairy paneer or Nestle Paneer and Frozen vegetables have been kept under the 5% bracket which would be largely neutral as the current rates are around 3-4%.
Although there are certain products like butter, Cheese and Ghee will get expensive under GST as they are placed in the 12% bracket which is higher than the current average tax rate of 4-5%. Gifting dry fruits at the time of Diwali is going to be more expensive as dry fruits have been placed under the 12% bracket under GST law.
FMCG sector is very pleased with the rates announced under GST law for FMCG products. The FMCG industry is going to benefit from the lower logistics cost and better competitive market and rates for most of the products being kept under the expected tax bracket.
A lot of FMCG companies set up their warehouses in states like Himachal Pradesh/Uttaranchal as they enjoy a lot of holidays/benefits/exemptions under the current tax regime. It is still not clear as to whether all the tax holidays/benefits/exemptions would exist under the GST law once it is implemented.
Major FMCG companies like Nestle, ITC, Hindustan Unilever, Dabur, Cadbury are anxious as the non-migration of Tax holidays/exemptions provided in current law could hurt the costing of the products of the company. GST transition is not just a transition of tax; it impacts every aspect of the business operations and therefore it requires a ‘whole of business’ approach to ensure a smooth transition.