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Impact of GST on FMCG
Companies in India
Impact of GST on FMCG Companies in India
Introduction
The fast-moving consumer goods (FMCG) sector is a significant contributor to both direct and indirect tax revenue in India. The FMCG industry is the fourth-largest sector in the Indian economy, with a market size of around ₹2.0 trillion. The major segments in the FMCG sector are:
30% Household sector (Fabric wash, household cleaners) 30% Personal care (Oral care, Haircare, Skincare, cosmetics, Hygiene and paper products) 50% Food and Beverages (Health beverages, Bakery, snacks, chocolates, ice cream, processed fruits and vegetable and dairy products etc.)
The implementation of the Goods and Services Tax (GST) in India on July 1, 2017 has had a significant impact on the FMCG sector. GST has subsumed various indirect taxes, resulting in a simpler tax regime and the removal of the cascading effect of taxes.
Objectives
The primary objectives of this research paper are:
To study the impact of GST on the companies in the FMCG Industry in India. To analyze whether the impact, if any, is positive or negative. To analyze the impact of Goods and Service Tax on the sales, purchases, net profit, tax, and stock prices of the selected FMCG companies pre and post GST.
Review of Literature
"A Study on Impact of GST after its Implementation" by Milandeep Kaur, Kajal Chaudhary, Surjan Singh, Baijinder Kaur (2016): This research focuses on the impacts of GST after its implementation, the difference between the present indirect taxes and GST, and the benefits and challenges of GST. The researchers use the Consumer Price Index (CPI) to analyze the significant impact of GST on various items, which is estimated to be around 20-25%.
The researchers conclude that GST would reduce the tax burden and play an active role in the growth and development of the country.
"The Impact of GST (Goods and Service Tax) on the Indian Tax Scene" by Aurobinda Panda (KNT School of Law) and Atul Patel (KIIT School of Law) (2010):
This research paper analyzes how GST would impact the Indian tax scenario. The authors discuss the brief history of Indian taxation and its structure, as well as the background of GST outside India and in India.
The authors conclude that GST would be beneficial for the industry and the consumers, and it would lead to an increase in revenue for the government.
"GST in India, a Key Tax Reform" by Monika Sehrawat and Ubasana Dhanda (December 2015):
This research presents an overview of the GST concept, explains its features, and highlights the advantages and disadvantages of GST in India.
The author concludes that GST fulfills the requirement of a simplified, user-friendly, and transparent tax system, and it will lead to higher employment opportunities and a flourishing GDP by 1-15%.
"GST and its Probable Impact on the FMCG Industry in India" by Dr. Mohan Kumar and CA Yogesh Kumar (April 2017):
This paper analyzes the impact of GST on the FMCG industry.
The researchers state that the peak tax cost for industry players amounted to approximately 27% (excise duty of 12.5% and VAT ranging from 12-15%) under the pre-GST regime, and the proposed revenue- neutral rate under GST would be in the range of 16-19%.
"A Study on Perspective Impact of GST on FMCG Sector in India" by R. Hiremani Naik and Sudina T.A. (December 2017):
This research focuses on the possible positive and negative impacts of GST implementation on the FMCG sector.
The researchers highlight that the FMCG sector is the fourth-largest sector in the Indian economy and is likely to see a significant impact once the GST bill is passed, as companies set up warehouses across states to have a more tax-efficient system.
"A Study on Impact of Goods and Service Tax on Indian Industries" by Rajkumar Chandran (September 2017):
This research paper discusses the impact of GST on Indian industries, with a specific reference to the FMCG sector.
The paper explores the positive and negative effects of GST on the FMCG sector using an exploratory research methodology and secondary data sources.
Bibliography
Milandeep Kaur, Kajal Chaudhary, Surjan Singh, Baijinder Kaur (2016). "A Study on Impact of GST after its Implementation". IJISSH, Volume 1, Issue 2. Aurobinda Panda (KNT School of Law), Atul Patel (KIIT School of Law) (2010). "The Impact of GST (Goods and Service Tax) on the Indian Tax Scene". SSRN. Monika Sehrawat, Ubasana Dhanda (December 2015). "GST in India, a Key Tax Reform". International Journal of Research- Granthalayah. Dr. Mohan Kumar, CA Yogesh Kumar (April 2017). "GST and its Probable Impact on the FMCG Industry in India". International Journal of Research in Finance and Marketing. R. Hiremani Naik, Sudina T.A. (December 2017). "A Study on Perspective Impact of GST on FMCG Sector in India". International Journal of Research in Business Studies. Rajkumar Chandran (September 2017). "A Study on Impact of Goods and Service Tax on Indian Industries". International Journal of Innovative Research in Management Studies. Lourdunathan F., Xavier P. (December 2016). "A Study on Implementation of Goods and Service Tax in India: Prospects and Challenges". Internal Journal of Applied Research. Moneycontrol.com National Stock Exchange (NSE)
Introduction
The earlier tax system in India was a complex system, resulting in a multiplicity of taxes, cascading effects, and complicated tax obligations. The Goods and Services Tax (GST), which came into effect on July 1, 2017, subsumed various indirect taxes under a single tax regime. GST aimed to create a simple tax system by removing the cascading effect.
India has adopted a dual taxation system, where the state and central government together collect the tax. The tax slabs under GST are 5%, 12%, 15%, and 18%, with some essential goods like fresh meat, eggs, bread, fruit, honey, and salt being exempted.
The Indian FMCG (Fast-Moving Consumer Goods) industry has a market size of 2.0 trillion and is the fourth-largest sector of the economy. The major segments in the FMCG sector are:
FMCG Sector Segments
30% Household sector (Fabric wash, household cleaners) 30% Personal care (Oral care, Haircare, Skincare, cosmetics, Hygiene and paper products) 50% Food and Beverages (Health beverages, Bakery, snacks, chocolates, ice cream, processed fruits and vegetables, and dairy products)
GST is expected to have a significant impact on the FMCG sector. The simpler tax regime under GST is likely to benefit FMCG companies, affecting their pricing strategies, sales, costs, and tax compliance.
Objectives
The research paper has the following objectives:
To study the impact of GST on the companies in the FMCG Industry in India. To analyze whether the impact, if any, is positive or negative. To analyze the impact of Goods and Service Tax on the sales, purchases, net profit, tax, and stock prices of the selected companies pre and post GST. To identify the positive and negative impacts of GST on the FMCG sector.
Review of Literature
Milandeep Kaur, Kajal Chaudhary, Surjan Singh, Baijinder Kaur (2016): The research focuses on the impacts of GST after its implementation, the difference between the present indirect taxes and GST, and the benefits and challenges of GST.
Aurobinda Panda (KNT school of Law), Atul Patel (KIIT school of law) (2010): The research paper analyzes how GST would impact the Indian tax scenario, providing a brief history of Indian taxation and its structure.
Monika Sehrawat, Ubasana Dhanda (2015): This research presents an overview of the GST concept, its features, and its implementation in India, highlighting the advantages and disadvantages of GST.
Dr. Mohan Kumar, CA Yogesh Kumar (2017): This paper analyzes the impact of GST on the FMCG industry, noting that the proposed revenue- neutral rate under the GST regime would be in the range of 16-19%.
R. Hiremani Naik, Sudina TA (2017): The research focuses on the possible positive and negative impacts of GST implementation on the FMCG sector.
Rajkumar Chandran (2017): The research paper discusses the impact of GST on Indian industries, with a specific focus on the FMCG sector, highlighting the positive and negative effects of GST.
Lourdunathan F and Xavier P (2016): The paper highlights the background, prospects, and challenges in the implementation of GST in India.
Aayushi Shukla (2020): The article discusses the positive and negative impacts of GST.
Data Analysis and Interpretation
A. Hypothesis
Null hypothesis H0: there is no significant impact of GST on the company Alternative hypothesis H1: there is a significant impact of GST on the company
B. Nestle India
In 2016, the sales increased by 12% compared to 2015. In 2017, the sales increased by 8.5% compared to 2016. In 2018 and 2019, the sales increased by 12.82% and 9.5% respectively compared to the previous years. The net profit for 2016 was 64%, while for 2017, 2018, and 2019 it was 32%, 31%, and 22% respectively. This suggests a significant impact on the net profit of the company after implementing GST, with a gradual decrease in the net profit.
C. Marico
In 2016, the sales decreased by 1.6% compared to 2015. In 2017, the sales increased by 6.8% compared to 2016. In 2018, the sales increased by 16%, and in 2019, the sales decreased by 0.25% compared to the previous years. The net profit for 2016 was 12%, while for 2017 and 2018 it was 1.9% and 37% respectively. In 2019, there was a decrease in the profit of 8.1% compared to 2018. This suggests high fluctuation and increased sales and profit of the company after implementing GST.
D. Manpas and Beverages LTD
In 2016, the sales increased by 54.87% compared to 2015. In 2017, the sales increased by 26% compared to 2016. In 2018, the sales increased by 35%, and in 2019, the sales decreased by 33% compared to the previous years. The net profit for 2016 was 4.2%, while for 2017 and 2018 it increased by 44% and 40% respectively. In 2019, there was a huge net loss for the company. This suggests high fluctuation and decreased sales and profit of the company during 2019 after implementing GST.
E. ITC
The sales and net profit data for ITC is the same as that for Manpas and Beverages LTD.
F. HUL
In 2016, the sales increased by 3.03% compared to 2015. In 2017, the sales increased by 7.18% compared to 2016. In 2018, the sales increased by 9.5%, and in 2019, the sales increased by 1.2% compared to the previous years. The net profit for 2016 was 8.03%, while for 2017 and 2018 it increased by 16.05% and 15.98% respectively. In 2019, it was 11.48% compared to the previous year. This suggests not much fluctuation after implementing GST.
G. P and G
In 2016, the sales increased by 6.4% compared to 2015. In 2017 and 2018, the sales increased by 6.61% compared to the previous years. In 2019, the sales increased by 19.98% compared to 2018. The net profit for 2016 was 22.5%, while for 2017 and 2018 it increased by 2.2% and 15.5% respectively. In 2019, it was 11.89% compared to the previous year. This suggests a constant increase in the net profit after implementation of GST.
H. Godrej
In 2016, the sales increased by 10% compared to 2015. In 2017, the sales increased by 6.2% compared to 2016. In 2018, the sales increased by 4.78%, and in 2019, the sales decreased by 3.91% compared to the previous year. The net profit for 2016 was 36.46%, while for 2017 and 2018 it increased by 24.93% and 43.34% respectively. In 2019, the sales decreased by 56.5% compared to 2018. This suggests an increase in the net profit after implementation of GST, but a depletion in the net profit and sales rate of increase for 2019.
I. Dabur
In 2016, the sales decreased by 2.13% compared to 2015. In 2017, the sales increased by 1.42% compared to 2016. In 2018, the sales increased by 10.27%, and in 2019, the sales increased by 2.21% compared to the previous years. The net profit for 2016 was 2.09%, while for 2017, 2018, and 2019 it increased by 6.5%, 10.62%, and 0.18% respectively compared to the previous years. This suggests an increase in the net profit after implementation of GST.
J. Britannia
In 2016, the sales increased by 6.8% compared to 2015. In 2017, the sales increased by 7.8% compared to 2016.
Tax Simplification: GST has replaced various taxes and duties with a single Central GST and State GST, simplifying the tax system. Reduced Cost of Doing Business: GST has eliminated the need to pay different taxes in different states, reducing the cost of doing business.
Benefit of GST for the Centre and the States
Experts predict a $15 billion annual financial gain from implementing GST. GST will promote more exports, creating more employment opportunities and boosting economic growth.
Benefit of GST for Individuals and Companies
Individuals will benefit from lower prices, leading to increased consumption and production. Companies will benefit from the reduced cost of doing business and increased competitiveness in the international market.
Impact of GST on the FMCG Sector in India
Negative Impact of GST
Dual Control : GST is referred to as a single taxation system, but in reality, it is a dual tax because both the state and center will collect separate tax on a single transaction of sale and service.
Incumbent Increase of the Cost of Some Commodities : The tax rate has been increased for many products, thus increasing their costs.
Some Sectors at a Loss : Sectors like Textile, Media, Pharma, Dairy Products, IT, and Telecom are bearing the brunt of a higher tax. The price of commodities like jewelry, mobile phones, and credit cards has also increased.
Real Estate Market Affected : Economists are of the opinion that GST in India has already had a negative impact on the real estate market. It has added up to 8 percent to the cost of new homes and reduced demand by about 12 percent.
GST Rates for FMCG Products
Basic Food Products : Milk, rice, wheat, and fresh vegetables have been kept under the NIL bracket.
Paneer and Frozen Vegetables : These have been kept under the 5% bracket, which would be largely neutral.
Butter, Cheese, and Ghee : These are expensive under GST as they are placed in the 12% bracket.
Dry Fruits : Gifting dry fruits at the time of Diwali is going to be more expensive as they have been placed under the 12% bracket.
Toothpaste, Soaps, and Hair Oil : These have been put under the 18% tax slab, in accordance with the government's viewpoint of keeping tax rates low for mass consumption products.
Detergents and Shampoo : The higher tax rate of 28% for these daily- use, mass consumption items is a real dampener.
Premium Category Items : Aerated drinks, health supplements, liquid soap, and skin care have been mostly put under the highest tax slab of 28%.
Ayurvedic Products : These are taxed at 12%, slightly higher than the prevailing rate, upsetting Dabur, which has a wide portfolio of ayurvedic products.
Positive Impact of GST
Reduction in Logistics and Distribution Cost : GST will eliminate the need for multiple sales depots, and the effective distribution cost for FMCG companies is expected to drop from 2-7% to 1.5% of their turnover.
Input Credit on Supply of Goods Held in Stock : Registered persons holding stock of goods that have suffered tax at the first point of sale can avail input tax credit at the rate of 40% of the state tax applicable on the supply of such goods.
Elimination of Non-creditable Input Taxes : Under GST, there would be input credit available for all the GST payments made in the course of business, unlike the current tax regime where certain taxes like CST, CVD, and SAD were non-creditable.
Reduction of Tax Rate : The current tax rate for the FMCG industry, including all the taxes, is around 22-24%. The GST rate schedule indicates that nearly 81% of all items are in the 18% tax bracket or below.
Saving of Cost in Maintaining Multiple Warehouses : The elimination of the 2% origin tax of central sales tax (CST) will provide an opportunity for FMCG companies to consolidate their warehouses.
Tax Holidays and Exemptions : FMCG companies that have set up their warehouses in states like Himachal Pradesh and Uttarakhand to avail tax holiday benefits and exemptions will still be able to do so under the GST regime.
being an important player in the market, has been impacted by GST to some extent.
This research concludes that GST has had an impact on various aspects of FMCG companies. However, since it has only been a year since the GST law came into force, the extent or degree of such impact cannot be completely fathomed. It would require more time to evaluate whether GST would prove to be beneficial to FMCG companies. As of now, it seems that GST is beneficial to these companies.
GST is levied on all supply of goods and provision of services, as well as their combination. Therefore, all sectors of the economy, including industry, business, government departments, and the service sector, will have to bear the impact of GST. The GST has an impact on every facet of business operations and requires a 'whole of business' approach to ensure a smooth transition.
