GST impact on FMCG: Beneficial, but contentious issues remain

By Suresh Nair

Fast moving consumer goods (FMCG) is the fourth largest sector in the Indian economy. There are three main segments in the sector – food and beverages which accounts for 19 per cent of the sector, healthcare which accounts for 31 per cent and household and personal care which accounts for the remaining 50 per cent.

The FMCG sector has grown from $ 31.6 billion in 2011 to $ 49 billion in 2016. The sector is further expected to grow at a CAGR of 20.6 per cent to reach US$ 103.7 billion by 2020. FMCG revenue grew 14.8 per cent during October-December 2017. FMCG sector is expected to register net revenue growth of 11.8 per cent in Q4 March 2018.


Going by the above statistics, it would be only fair to infer that the sector has done well in the GST regime and has been able to transition without any major hiccups.

The GST journey thus far:
In order to control inflation and to ensure that GST does not have negative impact for the consumer, the Government tried to align GST rates with the indirect tax effective rates (excise plus VAT / sales tax and other taxes such as octroi duty, entry tax). GST rate for products of mass consumption such as aata, edible oils, cereals, milk, etc was pegged at 5%.

For products such as medicines, fruit juices, pencils ball point pens, GST rate was pegged at 12%. Products such as hair oils, soaps, tooth pastes, kajal sticks, were classified in the 18% bracket. Many items of daily consumption such as shampoos, deodorants, detergents, cosmetic products, chocolates were placed in the 28% bracket.

The Government’s rationale for 28% rate was to match the tax rate with the pre GST rates of 12.5% central excise duty and 12% -15% of VAT. However, a high percentage of consumer goods are manufactured in Excise free zones in Himachal Pradesh, Uttarakhand, the North East states and enjoyed central excise duty exemption or duty refund, thereby making the pre GST effective indirect tax rate in the range of 21%-23%. The Government addressed the said concern by reducing the GST rates for 175 plus products from 28% to 18% with effect from November 15, 2017.

A much talked about feature of GST in India was the GSTN, a specialised IT network which would match the outward supply transactions of the supplier at an invoice level with the inward supplies of the customer and allow input tax credit to the customer based on a matching concept.

However, ongoing live with the said compliance framework via GSTN, companies faced substantive challenges in the initial months in uploading invoice wise details on account of technical glitches / IT network issues, lack of practical knowledge on the requirements thereof / awareness on the uploading process. While larger companies could navigate this challenge with the help of their tax consultants, smaller companies struggled to meet this statutory requirement. Considering these pain points of the industry, the Government has kept the online reconciliation and matching exercise on hold and is also working on a more simplified model for return filing.

A critical impact area for consumer goods sector is the anti-profiteering provision under GST law which requires every company to pass on the benefits arising out of GST to its customers by reducing their prices. The Government has devised a mechanism for a consumer to make a complaint to the National Anti-profiteering Authority for any product where the consumer believes that the GST triggered benefit has not been passed on.

Based on the complaints made, the authorities have initiated inquiries and investigations on companies. In the absence of guidelines from the Government, there is an ambiguity in the FMCG sector on the mechanism to be followed for determining the quantum of tax benefits to be passed on and the methodology thereof.

FMCG companies having manufacturing units in Excise free zones had to switch over to a new “Budgetary Support Scheme” under which 29% of IGST or 58% of CGST paid in cash is allowed as a refund. Since the said refund is now restricted to a percentage of GST paid in cash, the quantum of cash benefit has reduced under the new scheme as compared to the past. Industry is hopeful that in the coming days with buoyancy of GST revenue, the quantum of benefits would be restored and aligned to the pre GST regime.

The industry is also faced with certain contentious issues in terms of the tax position to be taken under the GST law. There are transactions relevant to the FMCG on which clarity is still awaited, such as whether input tax credit required to be reversed in cases such as goods given free under schemes such as ‘buy 1 get 1 free’, free samples and gifts given to distributors, promotional materials such as banners, posters, etc.

The latest addition to the GST compliances is the requirement to generate E- Way bill to accompany movement of goods. A consignment not supported by a valid E – Way Bill could be confiscated and this could potentially lead to business disruptions. Hence, the E Way Bill compliance has assumed importance and has a big impact on the supply chain processes of companies. The Industry is slowly but steadily coming to grip with the said requirement.

The GST saga for the FMCG does not end here. We could expect further changes in law which should be beneficial for the sector. One of the key areas to look out for is the simplified GST return model and the way forward on the online transaction matching process.

Suresh Nair is Tax Partner, EY India.