Impact of Goods And Services Tax on Fast-Moving Consumer Goods (FMCG) Sector

INTRODUCTION

FAST-MOVING CONSUMER GOODS (hereafter referred to as FMCG) are goods that sell quickly and for a low price. Consumer packaged goods are another name for these goods. This is one of the industries that makes a significant contribution to our economy. India is one of the largest producers of FMCG products. The FMCG industry is India’s fourth largest economy, and it is divided into three categories: Food and Beverages, Household, Personal Care, and Health Care, with 19%, 50%, and 31% of the total being accounted for. Increased reliance on online purchasing, as well as improved infrastructure and living standards, has provided FMCGs with new distribution channels and prospects. The Goods and Services Tax (GST), which went into effect in 2017, is widely regarded as one of India’s most reformative laws. GST is a consumption-based tax that has taken the place of various other indirect taxes in the country. It is levied on products and services sold, manufactured, and consumed. GST has a wide range of effects on the FMCG industry. Because it impacted the top tier companies, the companies began revising their rates and prices in response to the GST implementation, which benefited the factory by reducing costs, the distributors by reducing transportation costs, and, of course, the consumers by obtaining products at a lower price because the companies began to revise their prices. Here, we will focus on GST’s impact on price, supply chain, and some other operational aspects that are involved in an FMCG industry.

THERE ARE DIFFERENT TYPES OF FMCG FEW ARE LIST BELOW:

• Processed foods: Cheese products, cereals, and boxed pasta.
• Prepared meals: Ready-to-eat meals.
• Baked goods: Cookies, croissants, and bagels
• Fresh, frozen foods, and dry goods: Fruits, vegetables, frozen peas and carrots, and raisins and nuts
• Beverages: Bottled water, energy drinks, and juices.
• Medicines: Aspirin, pain relievers, and other medication that can be purchased without a prescription.
• Cleaning products: Baking soda, oven cleaner, and window and glass cleaner.
• Cosmetics and toiletries: Hair care products, toothpaste, and soap.
• Office supplies: Pens, pencils, and markers.

The below provided table explains how HUL, P&G, Jyothy Laboratories, Nestle, Dabur, Himalaya, and other companies are among the GST-affected businesses. According to statistics, these companies have been taxed at a higher rate than before. [1]

Tax rates on toothpaste, hair oil, and soaps, on the other hand, have been decreased from 22-24 percent to 18 percent. Colgate-Palmolive, HUL, P&G, and other companies benefit from this.

SPECIAL CONSIDERATIONS: FAST-MOVING CONSUMER GOODS AND E-COMMERCE[2]

Non-consumable goods—durables and entertainment-related products—are, unsurprisingly, the most popular e-commerce category. Shoppers all over the world are increasingly buying products they need online because it provides advantages that brick-and-mortar retailers cannot, such as delivering goods directly to their door, a large selection, and reasonable costs. The online market for grocery and other consumable products is expanding as companies rethink delivery logistics efficiency to reduce delivery times. While non-consumables may continue to outnumber consumables in terms of volume, improvements in transportation efficiency have expanded the usage of e-commerce channels for FMCG acquisition. When it comes to non-consumable items, where customers usually have a specific item in mind, online searching and shopping are almost always one-to-one. Consumable products have lower online browse/buy intention than non-consumable products, but they have just as strong browse-to-buy correlations, which could explain their rising online sales.

AN INFLUENCE ON PRICES

FMCG goods are sold to the end consumer based on Maximum Retail Price (“MRP”), which is inclusive of all taxes, including the GST. “Any reduction in rate of tax on any supply of goods or services, or the advantage of input tax credit shall be passed on to the recipient by way of proportionate decrease in prices,” according to Section 171 of the Central Goods and Services Tax Act, 2017 which provides for anti- profiteering measure.

IMPORTANT ACTIONS THEY CAN TAKE TO ENSURE COMPLIANCE WITH THESE MEASURES-

• Maintaining cost records: Keep accurate cost records and ensure that the ultimate cost of the product includes all preliminary expenses.
• Cost categorization: It is also a good idea to divide costs into departments based on product-specific costs and general miscellaneous and overhead expenditures.
• Impact Assessment of pre-GST and post-GST pricing: Based on the calculated cost, an analysis of the costs and the related indirect taxes should be performed for both the pre-GST and post-GST regimes. The advantages of a lower rate or an additional input tax credit under the GST regime should then be calculated. In both pre- and post-GST regimes, the Harmonized System of Nomenclature (HSN) was used. While comparing the base on HSN is typically not a difficult operation, it gets a little more complex in the case of FMCGs due to the large number of stock keeping units (“SKUs”).
• Establishing mechanisms to pass on the profits from the implementation of GST: A supplier can choose from a variety of options for passing on GST advantages to downstream value chain players, including promotional plans, discounts, and lowering the Market Retail Price (“MRP”), among others.

Many FMCG companies acquired multiple area-based exclusions prior to the implementation of GST, giving them a tax holiday of 10 to 15 years. Following the implementation of the GST, states implemented a couple of Budgetary Support Schemes to cover the remaining tax vacations. A company must still pay GST under this scheme, but a portion of it will be reimbursed. The percentage of GST paid in cash is used to compute this refund. However, because businesses must first pay GST before receiving a refund, there is a drop in cash flow due to the lower return rate. Furthermore, the payment and return process causes delays in the receipt of benefits. This is one of the negative impacts of GST application.

IMPACT ON SUPPLY CHAIN

Before GST, there were a variety of indirect taxes that varied by state, such as Sales Tax, Excise Duty, Octroi, and so on. Because these taxes were mainly focused on geography, they had a significant impact on all enterprise’s supply chains. FMCGs typically have a multichannel distribution strategy and multiple value chain actors. In addition to their physical channels, most FMCG companies have recently expanded their reach to include internet outlets. In addition to the state VAT and excise duty, companies were liable to taxes on goods entering the country and the Central State Tax (CST). However, the introduction of an unified tax in the form of GST, as well as the abolition of the CST for goods movement between states, has a number of positive consequences for any company’s supply chain. Instead of incurring the expenditures of establishing a warehouse in each state where they do business merely to avoid CST, businesses can now combine and upgrade their warehouses. Supply chains may now be focused on providing excellent customer service rather than being reliant on logistical costs. In other words, taxes would no longer be a consideration in determining the size and location of a warehouse. This improves efficiency, lowers logistical expenses, and lowers long-term distribution expenses.

REPERCUSSIONS FOR OTHER OPERATIONAL ASPECTS

The generation of an E-way Bill is required under the GST regime to transfer any consignment of products with a value over Rs. 50,000, whether it is for sale, job work, or exhibition. Because of the magnitude of the FMCG sector’s operations, they move a lot of items in a day, whether it’s shipping transactions, client deliveries, or exports. This places a significant burden on the sector to fully comprehend the E-way Bill requirements and assure full compliance with all required documentation.

CLASSIFICATION OF PRODUCTS AND CHANGES IN RATES

FMCG firms are eligible to several exclusions based on the final purpose or condition of a product. For instance, some items are eligible for an exemption if they do not bear a registered brand name or if they are not packaged in a unit container. As a result, these items must be properly categorised. Furthermore, maintaining records of exempt and taxable products is required even when computing input tax credit reversals. Because GST rates vary often, businesses must examine their HSN masters and rates on a regular basis.

IMPACT OF RECENT AND PROPOSED AMENDMENTS IN GST COMPLIANCE ON THE FMCG SECTOR

There is a proposal to implement an E-invoicing system, which would be effective from 1st October, 2020. This new E-invoicing system is intended to improve the interoperability of GST-related papers.. This raises the procedural load on FMCG firms, as they must now create an E-invoice for each and every supply. This E-invoicing need is in addition to the current need of creating E-way invoices. Filing returns GST Council has also introduced a new filing system which would also be effective 1st October, 2020 onwards. Suppliers are expected to input and amend their invoices on a regular basis under this new system. This might be a difficult and time-consuming operation for vendors. It is stated that the updated planned return filing approach will help to streamline any credit availability concerns. However, in addition to raising the compliance cost, this shift would be detrimental to return filers who were still getting acclimated to the new GST filing method and will now have to learn and embrace an entirely new filing method.

CONCLUSION

Under the GST regime, all taxes have been decreased, and some levies have been eliminated from the Indian market. The CST has also been eliminated. Thus, The introduction of GST has an influence on the Fast-Moving Consumer Goods market, both positively and negatively. The elimination of the cascading impact of taxation in the new system is unquestionably advantageous. Variations in GST rates, on the other hand, can be a little more difficult to deal with. Because GST is still relatively new and there are several stakeholders, it will take some time to see the entire impact on the Indian economy. However, in the long run, GST will cut costs, improve operational efficiency, and benefit both consumers and manufacturers in the FMCG industry.

[1] https://sinewave.co.in/blog/how-gst-has-impacted-the-fmcg.aspx (ACCESED ON 15-06-2021)

[2] Fast-Moving Consumer Goods (FMCG) By WILL KENTON (https://www.investopedia.com/contributors/53661/) Reviewed By GORDON SCOTT (https://www.investopedia.com/contributors/82594/)