Fast moving Consumer goods are products that are sold quickly and have short shelf life. Fast moving consumer goods segment is the fourth largest sector in the Indian economy and the Food products are the largest consumption category in India.
The current Indirect tax regime in India provides for a complex tax environment due to multiplicity of taxes, tax cascading and elaborate compliance obligation.
Apart from this, FMCG industry today has a network design which is also entirely driven by the concept of stock transfers and then sale through depots.
In the light of the above developments, Industry would need to analyse the provisions of the draft law in detail and its impact on their business.
A) Tax Rates
FMCG goods typically attract excise duty of 12.5% and VAT ranging from 12.5% to 15% depending on states which make it effective rate of around 26 to 28%.
For sake of simplicity, we can categorized FMCG goods in three categories i.e Necessity, Comfort, luxury.
Yet GST council has not decided GST rate on different goods/ services. So as per my opinion necessity goods would fall under 5% rate of GST. If it so than GST would definitely benefit the FMCG industry in keeping the MRP of the necessity products lower, that would ultimately benefit the end consumer.
And for other goods, if the proposed GST rate will be decided by 18% then it would also be favorable for the FMCG Industry.
B) Excise free Zones
Many FMCG companies also have units in excise free zones located in Himachal Pradesh, Uttar Pradesh, North east states which currently enjoys excise holidays. So those goods are not liable to excise duty in current regime.
While in Proposed regime no such provision is inserted. Probably GST will give these benefits in the form of refund to those units located in excise free zones.
The location of the warehouse is generally chosen to minimize the cost of delivery and the local state taxes are also a factor considered by companies before locating a warehouse.
The sector is likely to see impact on supply chain and warehouses locations.Currently, companies manufacturing FMCG goods have many warehouses in different states and the stock transfer from one warehouse to another warehouse has not attracted any VAT but in GST regime stock transfer from one state to other would be taxable in IGST and tax paid would be available for input tax credit thereafter.
So this is going to be very major issue as it leads to blockage of money. It may also lead to re-evaluation of procurement and distribution arrangement.
D) IT system
Introduction of GST will also warrant up gradation and modification in the IT systems of the companies in terms of recording of transactions, changes in IT masters, tax coding systems, invoicing formats, formats of sales and purchase register in order to ensure that the information captured is in line with the statutory requirements under the GST law including registration requirements, invoicing, computation of taxes, filing of returns, maintaining statutory records, and generating reports and data required for assessments and audits undertaken by the tax authorities.
Government is sure of the benefits that the common man will get after implementation but it is good to see that what benefits the Industries will get. But after analyzing the GST regime it is obvious that necessity goods would become cheaper one GST is roll out.
Apart from this, Industries dealing in FMCG goods shall have to look upon their distribution channel and location of warehouse. All these things need to be factored to really come up to an understanding as to what happens to a particular product whether the price falls, remains constant or marginally goes up.