Is the new tax a boon for FMCG? - Views on News from Equitymaster

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Is the new tax a boon for FMCG?

Dec 23, 2011

Goods and Services Tax (GST) is a unified and centralized system for taxation in the country. It aims to reduce the cascading effect by replacing a multitude of indirect taxes such as central excise, service tax, VAT and inter-state sales tax (CST) with a single GST rate. Naturally, the implementation of GST will reduce the overall incidence of taxation for Corporate India which will ultimately be passed to the final consumer boosting demand. Moreover, it will usher in a level playing field by bringing small companies from the unorganized sector in the tax net thereby reducing their competitiveness. Therefore it will spell a win-win situation for Corporate India.

Apart from that, FMCG is one such sector that will derive additional benefits from the implementation of GST. To understand it we will have to try and understand the business dynamics of the FMCG sector. As the sector deals with goods that are consumed on a daily basis, companies are required to set up a wide distribution network to make goods readily available to the final consumer. Therefore companies set up warehouses and depots in multiple states across the country to be able to service consumers effectively. Ideally depots should be set up in such manner that it optimizes distribution costs for an FMCG company. However, in order to save inter-state sales tax the FMCG companies are often forced to set-up depots in far-flung locations that increase overall distribution costs.

A look at the distribution costs of FMCG companies clearly shows that it constitutes a sizeable 2-7% of turnover. The implementation of GST will eliminate CST. Thus companies can function and take decisions based on commercial perspectives and not the tax impact. Thus the number of warehouses required to service demand is expected to decline and the need to set up depots in less cost effective locations will be eliminated. In other words, FMCG companies will be able to optimize logistics and distribution costs in the GST era.

Company name Distribution costs/Sales (%)
Britannia 7%
Colgate 3%
Dabur 2%
GSK Consumer Healthcare 5%
Godrej Consumer Products 3%
Hindustan Unilever 5%
ITC 3%
Marico 5%
Nestle 5%
Procter & gamble Hygiene & Healthcare 4%
Tata Coffee 3%
Tata Global Beverages 2%
VST Industries 2%
Emami 3%
Source: ACE Equity

Not surprising that the FMCG companies are eagerly waiting for the GST roll-out. Godrej Group chairman, Adi Godrej, has said that the GST implementation will be the major growth driver for FMCG. As per the group, GST taxation system will lead to price reduction of around 4-5% across consumer categories boosting consumption. As per Marico, GST is expected to improve fiscal efficiency and enhance GDP growth rate which will favour the FMCG industry.

Differences between the Centre and States over the tax structure of GST and constitutional amendments pending, implementation of GST is getting delayed. According to the chairman of the Central Board of Excise and Customs, GST is expected to be implemented during the next financial year and the rates will lie between 16-20%. One thing is sure that once GST is enforced it will pave way for a borderless economy perpetrating free movement of consumer goods.

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