Impact of GST on FMCG Sector in India
Mr. Adeel Hussain Alie1, Dr. Javed Iqbal2, Mr. Sarfraz Ahmed3, Mr. Ajaz Ahmad Bhat4
1Research Scholar, School of Management Studies, BGSB University, Rajouri, J&K-185234
2Assistant Professor, School of Management Studies, BGSB University, Rajouri, J&K-185234
3Research Scholar, Department of Economics, BGSB University, Rajouri, J&K-185234
4Practicing Accountant, Srinagar, Kashmir, J&K-190001.
Goods and services tax (GST) is the biggest tax reform in Indian tax system. It includes excise tax, service tax, central sales tax, luxury tax, lottery tax, entertainment tax, octroi, state surcharge, and other surcharge on supply of goods and services. The GST replaced various multiple indirect taxes which were imposed on unlike items of goods and services. The GST helped in increasing central government revenue from past nine months, since GST has been introduced (1st of July, 2017) and solved the problem of “cascading effect” of tax. GST has emerged as “transparent taxation system” in the indirect taxation. Although GST will be more effective in coming future but presently it may not be free from constraints. The research paper will focus on framework of GST as well as Impact of GST on Fast Moving Consumer Goods (FMCG) Sector in India. After implementation of GST, FMCG Sector improved slightly as GST eliminated multiple-tax system.
The fourth largest sector in the Indian economy is Fast Moving Consumer Goods (FMCG) Sector. Almost 50% FMCG sales comes from food and beverages and 30% sales from household and personal care. In today’s era of globalization, market is full of FMCG companies and they try to sell their products by creating brand image in the minds of customers. Fast moving consumer goods are also known as consumer packaged goods. Growing online shopping habits among Indian youth and change in their lifestyles is the main reason of growth for the sector. The urban population is the major contributor to the overall revenue generation by the FMCG Sector in India and recorded a market size of around US$ 29.4 Billion in 2016-2017.
It must be noted that in the last few years the FMCG market has grown at a faster pace in rural India compared with urban India. The FMCG retail market in India is estimated to reach US$ 1.1 Trillion by 2020 from US$ 672 Billion in 2016 with expectation to grow at 20-25% per annum which will increase the revenue of FMCG sector. In 2016-17 revenue for FMCG companies was US$ 49 billion and is expected to grow 9-9.5% in financial year 2018, which will be $ 54 (app.) billions, if converted to INR, the market size will be Rs. 5400 crores.
OBJECTIVES OF STUDY:
1 To study the frame work of GST.
2 To study the impact of GST on FMCG Sector.
The study is based on secondary data collected from various books, blogs, articles published by experts in the national and international journals.
GST at a glance:
What does GST mean?:
GST Stands on Goods and Service tax. It is a single and consumption based tax on the supply of goods and services. It offers continuous chain of input tax credit from producer’s level up to retailer’s level. Therefore it is the final consumer who bears the GST tax, charged by the last dealer.GST replaced all indirect taxes levied by central and state governments.
Why GST in India?
Short Comings/Limitations in the value addition tax regime opened the way for GST. Following are the limitations of value addition tax regime.
· Multiplicity of taxes.
· Cascading/double taxation.
· Unavailability of credit of vat against excise/service tax and vice versa.
· Different states have different VAT rates and regulations.
Taxes to be included and not included in GST
Central TaxesIncluded in GST
State Taxes Included in GST
Taxes not included in GST
· Central Excise Tax
· Additional Excise Duties Tax
· Excise Duty under Medicinal & Toilet Preparation Act 1955
· Service Tax
· Central Sales Tax
· Additional Customs Tax
· Special Additional Customs Tax
· Central Cess Tax
· Value Addition Tax
· Tax on Entertainment
· Central Sales Tax
· Octroi Tax and Entry Tax
· Tax on Purchases
· Advertisement Tax
· Tax on Gambling
· Tax on Lottery and Betting
· Basic Customs Duty
· Human Consumption Alcohol
· Property Tax
· Stamp Duty Tax
· Toll Tax
· Electricity Duty
· Diesel /Petrol/ Natural Gas / Aviation Fuel.
GST is considered a path breaking indirect tax reform since Independence. IMF recommended the GST in order to improve the efficiency of tax system and increase the revenue of government. In 1954 France became the first country in the world which implemented GST. Almost 150 countries have implemented GST throughout the globe. A committee headed by Asim Dasgupta, then Finance Minister of West Bengal set up by NDA government in the year 2000, started discussion on GST in India.
Origin of GST in India
Kelkar task force committee strongly recommended the implementation of GST on national basis.
Former finance minister P. Chindambaram announced that GST would be rolled out, from 1st of April 2010.
NDA Government leaded the Constitution (122nd Amendment) Bill, 2014 on GST in the Parliament.
Lok Sabha advanced the Amendment bill 2014.
Raja Sabha passed the Amendment bill 2014.
Constitution (122nd Amendment) bill, 2014 assented by honorable President Parnab Mukherjee
The Central GST legislations (CGST Bill, IGST Bill, UTGST Bill, 2017 and GST “Compensation to States” Bill, 2017) were put forwarded in Lok Sabha.
Lok Sabha passed the central GST legislations.
The central GST legislations assented by honorable President.
GST was implemented to whole India.
It was decided in the 23rd meeting of GST Council, to keep the highest 28% tax slab for opulence and sinful items. Tax rate of 177 items have been shifted to 18% tax slab. Government have classified/categorized items in six major slabs 0%,0.25%,5%,12% and 28%.
Structure of GST in India:
A. Dual GST
Canada became the first country in the world which adopted the dual GST model. Due to federal structure of India, it also adopted the dual GST model. Under dual model, tax is charged concurrently/jointly by center and state governments on supply of both goods and services.
B. The constituents of GST
· CGST: Central Goods and Service tax is imposed as well as collected by central government.
· SGST: State Goods and Service tax is imposed and also collected by state governments.
· IGST: Integrated Goods and Service tax is imposed by center and state governments on all inter-state supplies.
C. HSN and SAC codes are used:
HSN (Harmonized system of Nomenclature) code is used to classify the goods and SAC (services accounting code) is used to classify service under the GST.
D. Legislative framework:
Under GST singe legisture is to be used. To impose CGST, CGST Act is to be used. Similiarly for levy of SGST, SGST Act is to be used even though every state has its own SGST legislations. But the main features of law like chargeability, definition of taxable event and taxable person, classification and valuation of goods and services etc. are same in all the SGST Acts. This saves the essence of dual GST.
E. Utilization of input tax credit (ITC):
ITC of CGST and SGST/UTGST is available throughout the supply chain, but cross setoff of credit of CGST and SGST/UTGST is restricted, however IGST Credit can be utilized for the payment of CGST/SGST/UTGST and vice versa.
Every Supplier/Dealer whose “aggregate turnover” in a financial year is more than Rs. 20 lakhs, or 10 lakhs if the supplier is carrying-out business in the special category states (Jammu and Kashmir, Arunachal Pradesh, Tripura, Manipur, Mizoram, Himachal Pradesh, Uttarakhand, Assam, Nagaland, Meghalaya and Sikkim) is mandatorily to register under Goods and Services tax.
G. Composition scheme:
Composition scheme is for small businesses to get them relief from monotonous GST formalities. A taxpayer whose turnover is less than Rs. 1.5 crores can opt for composition scheme. But for North Eastern States and Himachal Pradesh limit is Rs.75 lakhs. Apart from composition scheme certain goods have Nil or 0% GST rate to benefit the general public.
H. GST common portal:
GST portal is setup by the government for the development of all GST related activities. Activities like registration, return filling, payment of taxes, application for refund, analysis of taxpayer’s profile, claim of input tax credit etc. GST website is controlled by Goods and Services Network (GSTN).
I. Compensation cess:
Compensation cess is a special kind of tax levied as compensation in addition to the GST tax on the value of both inter and intra supply of goods or services or both. It is compensation to the states for loss of revenue due to implantation of GST, especially for those states whose revenue mainly comes from the export of goods/services. It is imposed on specified luxury items or demerit goods such as tobacco, pan masala, motor cars etc. for 5 years.
Advantages of GST:
No cascading effect:
GST is free from cascading tax which reduces in overall cost of goods and services, and that leads to GDP growth.
Sustainable growth: GST made indirect tax system simple and ease, which is very helpful in attracting foreign investment.
Reduction in tax evasion: Under GST everything is tracked online. Reconciliation can be done online between the parties which decreases the chance of tax evasion.
Simple and ease tax structure: GST made indirect tax so simple and ease. It reduces the various compliances as against present system.
Disadvantages of GST:
Increase in prices of essential goods: Under GST, tax rate of some essential goods like cereals increased which increased their prices too. Service tax also increased from 14.5% to 18% which made services more costly.
Online filling of returns:
online taxation is both advantageous as well as disadvantageous. Various returns like GSTR1, GSTR2, and GSTR-3B etc. have to be filled online by a taxpayer on monthly/quarterly basis. Some business owners find it difficult to processes themselves, and approaches to third party (CA/GST Practitioner) which increases their overall cost.
No GST on petrol/diesel:
Government doesn’t bring petrol, diesel and natural gas under GST regime. There is very high tax rate on petrol; if it would be brought under GST its price considerably will fall down.
Costly banking and financial related services: There is considerably high tax rate on banking, insurance and financial related services as compare to previous regime. On one side government promotes digital India dream but on other side makes such services costly.
Crash of GST Network:
GST network crushes several times especially during last date of filling of returns. Recently on the debut day of e-way bill GST network crushes. Crush of network creates much trouble for tax payers.
Impact of GST on FMCG Sector:
Under pre GST regime, maximum FMCG products were taxed at rates ranging from 22 percent to 24 percent for example, detergents were taxed at the rate of 23 percent, shampoos and beauty preparations were taxed at the rate of 24 percent to 25 percent, tax on sanitary towels and napkins was about 10 percent to 11 percent, tax on some daily use FMCG products like paneer, ghee, cheese, butter and milk was about 3 to 5 percent.
Under the GST regime, FMCG products are taxed under 0%, 5%, 12%, 18% and 28%. However if you deeply examine the impact of GST on individual products, we can see that tax rates of some products have increased, like tax on shampoo (Now taxed at 28%), detergents (Now taxed at 28%), sanitary towels (Now taxed at 12%) which is higher than before. Under GST tax on toothpaste, hair oil, and soaps is deducted from 22 percent to 18 percent. Whereas some daily use products like milk, eggs, fresh vegetable, wheat, rice, etc. are tax free. Big companies of this industry like Hindustan uniliver, patanjali, and ITC welcomed GST with open arms. However few firms of this sector are negatively affected by the GST tax rate, which still is changing.
Distribution and Transportation plays a vital role in FMCG industry. Distribution cost of FMCG sector in pre GST regime constituted 2 to 7 percent which is dropped to 1.5 percent in GST regime. The FMCG companies are saving a considerable amount in terms of logistic expenses. Due to true and fair supply chain management, payment of tax, availability of input credit, CST elimination resulted in reduction of overall transportation and distribution cost. Reduction in cost and taxes lead to cheaper consumer goods.
Recent study of CRISIL suggested that the warehousing cost for FMCG products is likely to reduce by 25-50 percent due to implementation of GST. Before the GST regime companies had to setup warehouses in those states where the effective tax rate were minimum irrespective of distance, but under GST companies can maintain their warehouses wherever they like. Reduction in warehousing cost also makes commodities cheaper.
Input tax credit:
Reconciliation facility of inward and outward supplies is available on the GST network, In case of mismatch between the details of “outward supplies” (Sales) uploaded by the supplier in GSTR1 and the inward supplies (Purchases) uploaded by the recipient (Purchaser) in GSTR2. Such mismatch is to be communicated to the purchaser. If the mismatch is not corrected by the vendor within prescribed time period, the purchaser (Buyer) will be accountable to pay the differential GST amount along with the interest. This provision of GST lays down the liability for non-compliance on the purchasers, i.e. the FMCG companies, as against their vendors.
No input credit on free samples:
In the FMCG industry promotional schemes like Buy 1 Get 1 Free are very common. Under the previous regime no VAT had to be charged on free samples, however according to sec 17 (5) of the CGST Act, an input tax credit will not be available for goods given as gifts or free samples. Non availability of input credit increases promotional expenses of FMCG companies, which results in increasing overall prices of FMCG products.
Working capital requirement:
Implementation of GST increased working capital costs of FMCG companies, as their payments are getting blocked at various levels in value chain. It also increased working capital requirements of FMCG Dealers and Wholesalers as manufactures of FMCG hold up their payments due to uncertainty about the tax liability and the tax sett-off for the supplied goods and services.
Advancement in effective tax rates:
Products like aerated and beverages now attract 28% GST in addition to 12% cess. It is because of such advancement in effective tax rates prices of such goods increased in the market. Under GST regime, effective tax rate of 40% is opposed to policy of maintaining equality with the pre GST weighted average tax which was below 40, stated by leading beverage companies.
FMCG distributors didn’t get much affected by the implementation of GST. A distributor gets his Fixed Margin on purchases from company. Moreover distributor is unable to evade tax under GST as the complete value chain is tracked online.
Common man (Consumer)
It is a consumer who bears the burden of indirect tax. Overall GST put a mixed impact on common man. Due to increase in inflation rate from 4% to 8% on many food items included grains and cereals affected middle class and below property line (BPL) class badly, apart from it common man is looted in the market on the name of GST.
Implementation of GST throughout India (included Jammu and Kashmir) is the biggest change in India. It is an outstanding step for a comprehensive indirect tax reform in India. Implementation of GST has put mixed impact on FMCG sector. Those FMCG companies whose tax incidence lowered, like Dabur, HUL, ITC have started to pass on the effect in the form of low prices. Changes in GST rates on regular intervals is very fruitful for some firms but not for other firms in the FMCG industry. GST may become game changer in the long run for the FMCG sector and may also have deep impact on Indian economy as well. But the short term impact reveals that GST has failed in bringing down overall cost of commodities, interestingly cost of some products has increased much more than cost of pre GST regime.
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Received on 22.10.2018 Modified on 24.11.2018
Accepted on 14.12.2018 ©AandV Publications All right reserved