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 most fastest growing sectors among all the sectors in the Indian econnomy.
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 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 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.
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 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.
Most of the FMCG companies receive services which are provided from multiple locations and received at multiple locations. In certain areas like broadcasting, advertising, it is difficult to determine the location for the receipt of service. GST still is unclear on as to who will be regarded as the service provider/receiver. A clarification regarding the determination of Service recipient and the carry forward of tax holiday laws is required under GST law. It is paramount for claiming the input tax credit for the FMCG companies. Overall FMCG sector would have a positive impact from GST.
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.