Goods & Services Tax (GST) in IndiaUncategorizedImplications of GST on the FMCG Industry

INTRODUCTION

Fast Moving Consumer Goods (FMCG) constitute the fourth largest sector in the Indian economy and account for over $100 billion USD in terms of market size. FMCG, or consumer-packaged goods, are products that are sold quickly and at relatively low costs. Examples include, but are not limited to, packaged goods, beverages, Over the Counter (OTC) medicines, sanitary products, etc.

There are three main sectors within the FMCG industry: Food and Beverages, Healthcare and Household, and Personal Care. Since a wide variety of goods is covered under the umbrella of FMCG, any changes in terms of price is bound to have effect on all types of households.

Earlier, indirect tax such as Value Added Tax (VAT) was applicable on FMCGs, which has now been replaced with the onset of the Goods and Services Tax (GST) in India. GST has replaced several taxes levied on the FMCG and has thereby impacted the distribution strategies of the companies.

The GST Model of taxation involves levy of tax on different products at different rates, which has resulted in significant price changes in numerous goods. Hereinbelow we have highlighted and analysed the implications of GST on the FMCG industry.

GST RATE ON FMCG

GST Rates for different goods or products under the FMCG have been categorized under different tax brackets by the Government. Basic food items including milk, certain milk products (lassi, curd, butter milk, etc.), cereals not bearing a brand name, salt, rice, maize, wheat, fresh vegetables, fresh almonds etc. have been categorized under the NIL bracket. Ultra high temperature milk, frozen vegetables, dried makhana, branded cereals, chalk, branded paneer (example: Mother Dairy paneer or Nestle paneer), etc. have been kept under the 5% tax bracket, which is mostly neutral since these products were previously taxed at around 3-4%.

Products such as butter, cheese, jams, beverages containing milk, notebooks, and ghee have become relatively expensive as they are now under the 12% tax bracket as compared to the earlier 4-5% average tax rate.

Some sugar based confectioneries, corn flakes, toilet paper, kitchen glassware, etc. are under the 18% tax bracket, whereas all goods containing added sugar and caffeinated beverages are taxable at 28%.

Impact of GST on FMCG

In 2019, FMCG firms dominated the list of industries overcharging their customers since the implementation of the GST in July 2017. Complaints have been filed against some major players in the FMCG industry including Hindustan Unilever Limited (HUL), Procter & Gamble India (P&G) and Nestle.

Further, the GST roll-out has also culminated numerous ambiguities. For instance, in the pre-GST era, FMCG firms had made heavy investments to set up different units in each state to trade within them and were granted area-based tax exemptions. The introduction of GST has created some confusion concerning tax refunds to such firms.

Moreover, some of the most commonly used goods have been taxed at the highest rate of 28%. A higher tax rate serves as a major deterrent in terms of consumption since products such as detergents and shampoo are daily-use, mass-consumption commodities. The products in the premium category have largely been taxed at the maximum rate of 28 percent, such as aerated beverages, health supplements, liquid soap, and skin care are among them.

Additionally, there are several concerns regarding anti-profiteering as well which need clarity. Anti-profiteering difficulties have arisen in the FMCG Industry as a result of the aforementioned transitional credits and also because of frequent changes in tax rates. As a result, businesses have been unable to pass on the benefits to their customers. There is still some confusion on how to calculate and estimate the manufacturer’s profit. Firms need to determine whether anti-profiteering needs to be implemented at the product level, consumer level, or to the business entity as a whole.

That impact of GST on various aspects have been specifically dealt hereunder:

1. On Prices

When FMCG products are sold to the end customers, they are generally priced on the basis of the Maximum Retail Price (MRP). According to the Legal Metrology Act, 2009 the MRP includes all taxes, implying that the MRP includes GST.

Section 171 of the Central Goods and Services Tax Act, 2017 (CGST Act) deals with anti-profiteering regulations which states that any reduction in the tax rate on any supply of goods or services, as well as the benefit of an input tax credit, must be passed on to the receiver in the form of a proportional price reduction.

The FMCG Industry is particularly sensitive to profiteering concerns since it is a consumer-facing industry. As a result, the entire value chain is responsible for passing on the benefits of lower pricing to their customers while also adhering to anti-profiteering laws.

One of the most intriguing challenges is regarding how suppliers should assure compliance with anti-profiteering regulations, as well as how anti-profiteering legislation should be implemented. The following measures may be adopted by the firms operating in the FMCG Industry to ensure anti-profiteering compliances:

• Proper maintenance of cost records and ensuring that all costs are taken into account when calculating the cost of the items;
• Bifurcation of costs into general and product specific overheads;
• Analysis of the applicable indirect tax rates and the price changes in both pre and post GST regimes to highlight the benefits accrued due to rate reductions or additional tax credits in the GST regime;
• Transmission of GST gains to downstream value chain participants through discounts, additional schemes, etc.

There were various area-based exemptions in the pre-GST era. Many FMCG firms benefited from these tax-break plans, which provided 10-15 year tax holidays. States have passed “Budgetary Support Scheme(s)” under the GST regime, which allow a set percent of the GST paid in cash to be refunded for the remainder of the time.

The Budgetary Support Scheme refund is calculated using a proportion of the GST paid in cash. Since the GST is paid first and then refunds are issued, there is not only a decrease in cash flow due to the lesser refund, but also a delay in receiving the benefits. Due to the implementation of the GST, this might have a negative impact.

Nevertheless, the implementation of GST has reduced the final production costs of FMCG goods. This is beneficial for both the manufacturers as well as the end consumers. This reduction in prices has also helped in raising demand for FMCG goods in rural areas.

2. On Supply and Logistic Strategies

The FMCG Industry has had extensive supply chains with several value chain actors and uses a multichannel distribution approach. In general, all FMCG companies are now offering their products through both physical and online channels.

In the past, area-based exemptions, taxes on entry of goods, as well as Central Sales Tax (CST) had a significant impact on supply chain structure. CST was applicable on inter-state movement of goods and generally became a cost because the set off of CST was not available against State VAT and also against Excise Duty. From a supply chain standpoint, the GST era brings uniform taxes and the abolition of the CST for interstate transport of goods.

Generally, firms determine the warehouse locations in a way to minimize the delivery costs for both the consumer and the manufacturer. Access to arterial highways, ports, and other shipping points are also taken into account, as well as labour availability. Companies also consider local state taxes when deciding where to locate a warehouse. Some businesses seek to establish warehouses in every state to avoid paying local taxes while transferring goods from one place to another.

For the purpose of avoiding CST for each state, businesses are encouraged to combine their warehouses under GST rather than keeping one in each state or they may adopt a hub and spoke transportation model. The spoke-hub distribution model or network is a system of connections constructed in the shape of a wire wheel, with all traffic flowing through spokes connected to a central hub.

Transportation, telecommunications, freight, and distributed computing are among businesses that employ this model. In comparison to the point-to-point approach, the hub-and-spoke architecture requires fewer routes. This will help in creating efficient supply chains, and the logistics expenses and distribution costs will be reduced.

GST is a single tax on products and services manufactured, sold, and consumed across India. The goal is to make India a uniform common market by imposing a single indirect tax. Through the input tax credit (ITC) system, GST is collected at every stage of the sale or purchase of goods or services. The interstate movement of goods has become more efficient as a result of the taxation system’s simplicity.

According to the World Bank, logistics costs in India are 2 to 3 times higher than worldwide benchmarks due to higher than ideal time spent per transportation. In plain words, India’s logistics costs are around 13% of GDP, compared to 8% in Western countries and 18% in China. However, after the implementation of GST, India has become a single market with no distinction between inter-state and intra-state commerce. The current inabilities have been disrupted, allowing for fundamental reengineering of the logistical network.

Under the GST regime, supply chain architectures are oriented towards customer service, and logistics costs and taxes are not the deciding factors while determining warehouse location and size. Additionally, in the past, service tax was an expense for distributors or individuals dealing in traded products since they were forced to reverse service tax in the event that their turnover included traded items.

With the ability to offset taxes paid on input services against output taxes on all supply, whether products or services, many FMCG companies may consider outsourcing certain services in order to achieve specialisation and focus on core productive activities.

3. Other Operational Aspects

Many critical concerns that have arisen as a result of GST implementation are yet to be addressed or resolved by GST officials. The FMCG Industry has faced a number of operational issues since the adoption of GST. Some of such issues are enlisted below:

1. E-way bill requirements

Under the GST regime it is mandatory to generate an e-way bill for transportation of every consignment of products over Rs. 50,000/-; irrespective the consignment is transported for sale, job activity or display.

There is a dire need for recognising the necessity for e-way bill requirements and ensuring compliance with the relevant documents in the FMCG business, where there are multiple movements per day and diverse situations such as bill to/ship to transactions, customer deliveries, movements for exports, and so on.

The use of e-way bill smoothens the inter-state and intra-state movement of goods as it reduces the barriers and check-points situations. This, in turn, effectively reduces the time taken for delivery of the consignments as well as supply chain costs.

FMCG firms have developed a regulated network within the organisation by utilising the sub-user capability provided by the e-way bill system. This feature allows FMCG firms to give different jobs to different workers so that they may monitor and control various e-way bill features.

2. Product Classification Requirements

Many FMCG firms often deal with a significant number of stock keeping units, necessitating the need of a competent classification system. Several exclusions are allowed based on the ultimate use of the items or under certain situations. Certain items, for example, are exempt from certain regulations if they do not have a registered brand name or are not packaged in a unit container (cereals, paneer, etc.). As a result, product classification must be done with care and revalidated in the context of the industry. Maintaining records for exempt and taxable products is also necessary for computing reversals of input tax credit under Rules 42 and 43 of the Central Goods and Services Tax Rules, 2017 (CGST Rules).

Since medicaments or ayurveda goods are taxed at a lesser rate, and cosmetics are normally taxed at a higher rate, the categorization of some cosmetics such as skin care treatments that also have medicinal benefits and include recognised medical components has been subject to litigation in the past.

In order to decide if a preparation or a product is medicament or not, it is necessary to check whether the preparation is principally intended for the treatment of skin problems or illnesses, and whether or not the substances in it have known or recognised therapeutic value.

The FMCG firms must thus review their HSN masters and product rates invoiced on a regular basis since GST rates are subject to frequent changes. In the event of a change in product rates, the time of supply provisions must be followed.

3. Promotional Schemes

The FMCG business is known for participating in a variety of promotional campaigns. In the FMCG business, a popular promotion is “buy one, get one free.” FMCG and retail businesses provide a wide range of programs or schemes to their distribution networks, and they are always developing owing to the evolving ecosystem. Some of these schemes are:

• Post-sale discounts:  price discounts, trade discounts, purchase based schemes;
• Special discounts: festive discounts, seasonal schemes;
• Bulk buy discounts, etc.

The aforementioned schemes may be either cash discounts or additional quantity supply. It also necessitates a factual analysis to determine if the secondary market programs qualify as post-sale discounts deductible under section 15(3)(b) or as a ‘subsidy directly linked to price’ under Section 15(2)(e) of the CGST Act. If it qualifies as a subsidy directly related to price, it will be subject to GST in the Recipient’s hands. It is critical to determine the tax treatment and ITC impact of various types of schemes, as well as to keep accurate records, so that the entire value chain follows proper tax procedures.

ITC is not granted for items delivered as samples, according to Section 17(5) of the CGST Act subject to conditions. In the absence of ITC, FMCG businesses may have to increase their promotional costs, resulting in an increase in overall product pricing.

Various Circulars have been issued on the GST handling of promotional costs and commodities given away for free or distributed as free samples. FMCG firms should carefully assess the legal status based on circulars and court rulings so that they do not become responsible for any statutory violations.

AMLEGALS REMARKS

The implementation of GST has had a mixed impact on the FMCG Industry. While the removal of the cascading effect under GST as opposed to the pre-GST system is favourable to all FMCG firms, changes in GST rates are helpful to some but not all FMCG companies.

Another benefit stems from the re-distribution approach used by a number of firms in the sector. Since it includes several stakeholders and a shift in the typical method, the outcomes will take some time to reflect. However, in the long term, it will undoubtedly save costs and enhance operational efficiency for FMCG firms, benefiting consumers.

Companies in the FMCG industry must thus prepare to take advantage of all the available opportunities to stay competitive and increase profits by realigning their distribution strategies.

–Team AMLEGALS, assisted by Mr. Ankur Mishra (Intern)