FMCG companies may not make higher profits on lower GST rates

MUMBAI: Lower rates of GST may not necessarily mean higher profits for Indian consumer firms, while the converse is equally true for those selling in limited pockets. The reason is a simple averaging of tax rates across all states instead of weighted averages, which would have mapped sales volumes to levies in the relevant states.

“On the surface, tax rates of certain products would have seemingly come down compared to existing rates under GST. But some companies may still have to increase prices,” said Pratik Jain, National Leader — Indirect Tax at PwC India. “This is mainly because for some products, the bulk of the sales take place in a few states where the current VAT may have been lower.”

Most products with a direct relationship between GST rates and profits include highend consumer items mainly sold in Mumbai, New Delhi, Bengaluru, and Chennai.

The simple averaging of tax rates could affect products such as shower gels, body washes, expensive paints, high-end refrigerators, washing machines, LED lights, and costly cellphones.The converse is equally true for many companies that sell about 60-80% of their products in two to four states: These firms could see a jump in their profits even when tax rates under GST are set to rise.

An email sent to the Central Board of Excise and Customs (CBEC) and revenue secretary Hasmukh Adhia, did not elicit any response until this report went for publication.

LITTLE SCOPE
According to a top tax officer, it would have been virtually impossible for the government to take weighted averages into consideration. “There is no reliable

data that could have helped the government to calculate weighted average of taxes paid by companies. Also, I doubt even companies collect sales data of each product in each state,” he said.

Experts point out that in some way, this could also impact the anti-profiteering clause under GST. “The government wants to ensure that the introduction of GST does not lead to inflation. Hence, it is keen to ensure that tax rate reductions are passed on to customers in the form of lower prices and has, therefore, introduced the anti-profiteering rules to keep inflation under control,” said MS Mani, senior director, Deloitte India.

Experts point out that in some instances, a handful of states imposing higher taxes has also distorted the average tax rate, which in turn influenced the GST rates.

The average rate was calculated by adding prevailing tax rates across India, and then dividing the total by the number of states and union territories.

People close to the development said the change in tax rates could also lead to increasing or decreasing inventory, as is evident in the case of high-end mobile phones.

“In the case of hearing aids or hearing implants, the tax rate in most states is nil, except some of where it is about 5%. The government, while giving exemption to hearing aids, has imposed a 5% GST for the hearing implants – the latest technology. On representation from the industry to reduce the rate of hearing implants, instead of reducing the rate, the GST council has increased the GST rate of hearing aid from nil to 5%,” said Sachin Menon, sais the national head of indirect tax at KPMG.

Tax Rates Influence Stocking Behaviour
“There are some instances where the tax rate under GST is higher than the present tax rates and in such cases, several dealers could increase their stock levels in the run up to GST. On the other hand, in those cases where the GST rate is lower than the current tax rates, dealers would try to keep minimum stock and dispose of non-moving stock before the onset of GST,” said Mani of Deloitte.
According to an analysis by ET, some other products that may be affected by the averaging include vacuum cleaners, electric shavers, travel sets for toiletries, dish-washing machines, pencil sharpeners and compass boxes.