FMCG sector is considered to be the fourth-largest contributor to the Indian economy with the total size of market exceeding USD 13 billion. This industry is commonly known as the industry of consumer packaged goods. Some of the items that fall under the purview of this industry comprises of all the consumable items apart from groceries and pulses, which shoppers generally buy at regular time intervals. FMCG is one of the most evolving and growth-oriented sectors among all the sectors that exist in our economy.
Under the present tax structure, FMCG sector is liable to pay a number of taxes such as Service Tax, VAT, Central Sales Tax and Excise duty. As GST will subsume these taxes, it will be a coverage of all the taxes under one unified tax net. In the current regime, the rate of tax for the FMCG industry would fall somewhere in the range of 22 to 24 percent. As per a recent meeting of the GST Council, it is expected to follow the GST slab rate of 18%. This will certainly come across as a pleasant change for major companies operating in the FMCG industry. It is also important to note that there is no facility for input credit for some of the taxes such as Central Sales Tax, Value-added tax and CENVAT as per the current structure of indirect taxation. However, once GST takes effect, there would be an availability of input credit on all GST payments that will be made during the functioning of the business.
FMCG sector stands to gain a lot from GST while saving on a substantial amount of costs incurred on logistics. The cost of distribution in the FMCG industry currently sums up in the range of 200 to 700 basis points of the total cost. A dip of 1.5% is also expected once GST is implemented completely. Once GST comes into effect, it would lead to a relatively seamless management of supply chain. There is also bound to be a huge reduction in the cost incurred on transportation and warehousing of goods. It is certainly expected that a fall in the cost and taxes incurred would be vital in making the consumer goods inexpensive.
Transfer of stock beyond the geographical boundaries of the State will fall under the purview of GST. There is still some level of clarity that is sought regarding the transfer of stock within the state. It also needs to be taken into account that initially, GST was meant to be applicable only for the inter-state transfer of stock, and not for transfer of stock at an intra-state level. Moreover, as far as the valuation of stock transfers go, GST would be applicable only on the value of transaction. Value of transaction generally refers to the price of goods and services that are paid. It needs to be noted that stock transfers do not fall under the consideration set and thus, such a provision cannot be executed. Apart from this, valuating GST norms mean that if the value of transaction is not accessible, then the monetary value of goods and services would be treated as the value of transaction of the same type of products with the same level of quality.
A large number of companies operating the FMCG industry have established their godowns and warehouses in States that tend to enjoy a lot of exemptions and benefits under the present taxation structure. Some level of clarification is still required on whether or not, all those benefits would be applicable post the implementation of GST. Top FMCG majors such as ITC, HUL, P&G, Nestle are eagerly awaiting a verdict as non-migration of those exemptions would mean higher costing of the products manufactured by these companies.
A majority of the players in the FMCG industry tend to receive services that are delivered from multiple geographical boundaries. In certain service industries like advertising, it is a rather complex process to gauge the exact location where the service has been received. With GST coming to the fore, it is still not clear that how do we need to differentiate between the service provider and the recipient of the service. A worthy clarification is also required for the same with several amendments in the GST law. It is instrumental for claiming a refund on the input tax credit for the companies operating in the FMCG industry. It can be inferred that FMCG sector would stand to gain a lot from the implementation of GST.
We can comprehend from the above discussion that GST is lot more than merely a transition into the new regime of indirect taxes. It is bound to have a huge impact on every major and minor aspect of business operations. Thus, it requires a professional approach to make a seamless transition into the GST regime.
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