Mahindra Logistics

How GST will benefit the FMCG Industry?

The proposed introduction of Goods and Services Tax (GST--- The Goods and Service Tax Bill, technically called the Constitutional [122nd Amendment] Bill, 2014,) has been described as one of the most significant indirect tax reforms in India’s history, seeking to bring clarity, simplicity and unification in the arena of indirect taxes across the country.

GST is being designed as a destination-based consumption tax, which essentially implies that the revenue will accrue to the State where the consumer resides. This is unlike the present origin-based levy where the revenue accrues to the origin State from where the movement originates. Thus, GST, an indirect tax, would be levied on ‘supply’ of goods and services and also when a consumer buys a good or a service. It is taxation based on supply as against the current structure of manufacture (Excise) or sale (Value Added Tax).

The fast moving consumer good (FMCG) sector in India comprises more than 50 percent of the food and beverage industry and another 30 percent from personal and household care, thereby spanning the entire rural and urban parts of the country. Reports suggest the sector contributes a significant USD 6.5 billion in direct and indirect taxes. Hence, the sector is likely to see a significant impact once the GST is passed as the companies set up warehouses across the states in a bid to have a more tax efficient system.

On this background, experts believe that the FMCG industry in India has a lot to benefit from GST. One of the key reasons is the fact that FMCG manufacturing-to-consumption journey traverses multiple States and currently is subject to various sales taxes, State border entry taxes in addition to the Central Excise. This not only means that every product becomes more expensive in the hands of the consumer but the entire journey involves wastage of precious time. Post-GST, delays and stoppages at border check posts are likely to get minimized and operations comparatively easier. Eventually, cost of products may drop because only one tax is expected to replace the existing multiple taxes, wherein a few taxes even amount to taxes on taxes.

The GST era is also expected to encourage building higher economies of scale in terms of bigger warehouses and bigger vehicles to carry the produce. Load consolidation for primary freight can allow use of bigger vehicles. For example, 24 ft in place of 20 ft and their higher efficiency can deliver savings of about 10%. It is therefore no surprise that most FMCG companies are planning to create a hub-and-spoke warehouse model. In this model, they will switch to a network consisting of one big warehouse ‘hub’, connected to smaller ‘spokes’ spread across the country. This will facilitate better management of logistics and faster movement of goods.

Almost all manufacturing companies’ current warehousing networks are designed on a State-wise basis on account of VAT laws. The stock transfer model has been adopted by FMCG companies to save on the CST costs applicable on inter-state sale of goods which is not available as a credit to the customer. Stock transfer of goods, which currently does not attract VAT / CST (if despatched against Form F), will attract IGST under the GST regime. While the IGST would be available as a credit at the consignee location, there would be a working capital impact on account of the IGST paid on stock transfers for the inventory holding period. As an alternate model, in case of direct inter-state sale of goods from factory to customers, IGST would be payable, which would be creditable to customers. Hence, companies would need to re-examine the existing distribution network in order to optimise the tax costs, working capital impact, whilst maintaining the customer service levels.

Warehouse consolidation would thus result in inventory pooling. This leads to lower inventory at the warehouse level and also lower total warehouse space. Larger warehouses can bring economies of scale, lowering costs. This not only stands to improve the profitability of FMCG companies but is also likely to benefit the consumers if the manufacturers decide to pass on some benefit to them. The transportation sector is also expected to see an increased level of efficiency in the nation-wide movement of larger capacity trucks, leading to faster factory-to-consumer journey of products, lesser stoppages at State border posts, lesser harassment of truck drivers across States, optimized fuel consumption, leading to not only lesser costs but also lesser air pollution.

GST is thus expected to play a Santa to the FMCG industry and infuse greater overall efficiency. This will enable FMCG companies contribute meaningfully to the overarching goal of the Indian Government to move up the country on the ‘Ease of doing business’ index.

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