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How GST will affect FMCG sector in India

6/19/2017
How GST will affect FMCG sector in India

With the introduction of GST, Fast Moving Consumer Goods (FMCG) sector is likely to get the huge benefits from it. The quick moving FMCG sector of India includes more than 50 percent of the nourishment and drink industry and another 30 percent from individual and household care products, along covering the whole rural as well as urban parts of the nation. Reports say that this sector contributes a noteworthy USD 6.5 billion in the arena of direct and indirect taxes. In India, GST is supposed to bring a uniform tax regime across the nation and supposed to change the Indian market into one basic market giving more options to work together and save resources wasted on transportation.

GST rate in FMCG sector

A few organizations, because of GST, is expected to gain more due to reduced standard tax rate (it’s proposed to be 18%) when contrasted with a present compelling duty rate of >26% (12.5% excise tax and VAT at 12-14.5% on top of excise). On the other hand, numerous agricultural processed items getting an exemption or lower tax rate (4-5%) under current tax regime if included under GST portfolio, then they will come into higher tax slab rate.

How GST will affect the business process of FMCG sector

In FMCG sector, considerable reserve funds can be created by organizations in logistics and circulation as GST will kill the requirement of multiple sales depots throughout the nation. Effective distribution cost for FMCG sector is roughly in the range of 2 to 7% of their turnover. At present FMCG sector pay, around 24-25% tax inclusive of the taxes like VAT, excise duty, entry tax and sales tax. However, the proposed GST at the rate of 18% will result in a significant reduction of taxes. As any supply (say stock purchase) would be treated as assessable under GST, it might prompt expanded prerequisite of working capital and income to be affected till return claims gets settled. For makers, who have set up their units in zones having tax holiday or incentives (like Himachal, Uttarakhand and so on.), won't be able to enjoy a similar advantage after the introduction of GST. FMCG wholesalers and retailers will be profited as they will have the capacity to set off input credit from services like transport and rent etc. against their GST liability, which at present is unrealistic.

Effect on the strategy of establishing warehouses in each state

Circulation or distribution costs account in the range of 2 to 7% of turnover for FMCG sector companies. Right now FMCG companies set up warehouses in each state (with the thought to stay away from CST on interstate transactions) and do stock transfers to them. In this way, merchandises are sold to wholesalers locally. The choice on warehouses depends on tax consideration as opposed to market closeness or transport consideration. Under GST as neighbourhood and interstate supply would be taxed impartially with India developing as a single biggest common market, the location of the warehouses should be re-evaluated. Savings in the range of 1-2 percent of sales is expected to be the result of the reconsideration of the place of warehouses. A level playing field would be made for little new companies in the matter of delivery of organic products. Once the GST kicks in, the time warehouses will pick up market as makers will be more inspired by specifically offering from the warehouses as opposed to exchanging to different outlets. The hi-end Value Added Services (VAS), for example, world-class track and trace, picking and packing will witness a rise. Expanded demand/supply is likely to rise because of expanded client desires and better sorted out supply chains.

Some clarifications which are required under the new GST regime

The vast majority of the FMCG companies get services which are given from various areas and gotten at different areas. In specific sectors like telecom and publicizing, it is hard to decide the area for the receipt of services. GST still is vague with respect to that would be considered as the service provider and receiver. It is vital for claiming input tax credit for the FMCG sector companies. To sum up, FMCG sector companies will have a positive impact from the introduction of GST.