GST will impacts on FMCG firms
GST will impacts on FMCG firms, The new Goods and Services Tax (GST) regime will bring several benefits of the economy, and could particularly valise (FMCG) the fast-moving consumer goods industry
Apart from driving supply chain inefficiencies, bringing untaxed players into the tax net—a large section of the industry still operates in the unorganized segment— will level the playing field for the larger, established players in the industry.
The GST rate structure shows that not all FMCG companies stand to benefit from the new regime.
GST beneficiaries
The rates for various FMCG segments have mostly been along expected lines. Items of mass consumption, toothpaste, soaps, hair oil and have been put under the 18% tax slab, significantly lower than 22-24% tax they have been paying. This is in accordance with the government’s stance of keeping tax rates low for mass consumption products. In fact, the GST rates schedule indicates nearly 81% of all items are in the 18% tax bracket or below. The remaining tax is 19% fall in the 28% tax slab.
Whose tax incidence has come down under the GST regime, they are likely to pass it on to the consumers in the form of lower prices. companies would be required to pass on the benefit of tax rates to the consumer in the form of lower prices.
Lower prices could potentially support volume growth for the certain products, particularly in rural segment. “We believe it could result in faster consumption shift from unbranded to branded products, spurring volume growth for FMCG companies. Simultaneously, it will bring operational efficiency with rationalization of supply chain by removing bottlenecks. Analysts point out that tax exemption provided to several critical products required for food processing cereals and milk and would benefit this industry.
So, which are the companies that their stands to gain from a benign tax regime? The extent of impact would depend on product mix of the companies. Oral care major Colgate Palmolive is likely to be emerge as the biggest beneficiary. “Colgate pays an effective tax on 25-26%.Particularly as it levels the playing field against Dabber, Patanjali, who enjoy tax benefits. Hair and edible oil companies too will benefits. “Marginally lower rates in the hair oil with no increase in edible oil rates will be benefit Marco.
Adversely impacted firms
Surprisingly, some of widely consumed products have been placed and under the highest tax slab of 28%, slightly higher than the rate levied earlier. “Higher tax rate in paints and possibly baby food will marginally impact Asian Paints and Nestle, Higher tax rate for detergents and shampoo is a real dampener since these are daily-use, mass consumption items. Manufacturers will have to pass on the higher tax incidence to the consumers in the form of a higher prices of these goods.
However, it will not have much impact on the sale volumes and say analysts. Most of the items belonging to premium category have been the highest tax slab of 28%. These include health supplements, skin care and aerated drinks, liquid soap, among other goods. But this is not going to a particularly negative impact on manufacturers they had been paying similar taxes earlier. The increase, in some cases, is only marginal. Could be hurt because of the higher taxes. Ayurveda products—a segment that is seeing increased focus from leading FMCG players are to be taxed at 12%, slightly higher than the prevailing rate. This may hurt Dabber, which has a wide portfolio of Ayurveda products. Mamie too could come under pressure. Ayurveda players were expecting the tax rate to go down, given the government’s thrust on populating traditional Indian medicine.
The GST rate structure is likely to be neutral or marginally positive and their broad portfolios would see mixed impact on FMCG. Increased for detergent, shampoo and skin care. For Godard Consumer Products, lower tax incidence on soaps and insecticides is a positive, but higher tax rate for hair dye is a negative.
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