FMCG companies brace for new set of GST challenges
From anti-profiteering to affixing stickers on existing stocks, new pain points emerge
It is the sixth month since the country’s biggest tax reform after independence was implemented. And just when consumer goods companies were managing to come over the initial hiccups emanating from the goods and services tax (GST), new pain points have emerged.
The biggest is the issue of antiprofiteering norms. Simply put, these are the rules to prevent companies from making excessive profits from the GST. While antiprofiteering provisions were cleared in June, just before the GST roll-out, no clear guidelines have been specified to date on how the calculation should be done. Companies that Business Standard spoke to say they are awaiting a proper framework to determine what constitutes profiteering and what doesn’t. The reason they said they would wait is because there is growing speculation of a likely product-specific approach to anti-profiteering as opposed to a company-specific approach.
In other words, the anti-profiteering body, set up last week under bureaucrat B N Sharma, will look at the input tax credit flowing into a product and the commensurate reduction in total tax incidence on that product to determine whether GST benefits have been passed on to consumers, sources said.
Companies as well as indirect tax experts say this is cumbersome since most firms typically have a number of stock-keeping units in their portfolio, whose price fluctuates from time to time depending on the season, promotion or competitive scenario.
“Anti-profiteering provisions provide that ‘any reduction in rate of tax or any supply of goods or services or the benefit of input tax credit shall be passed on by way of commensurate reduction in prices’. But the question is what is the base price that companies should take when seeking to apply this reduction,” Sachin Menon, partner and head, indirect tax, KPMG India, says.
This point is endorsed by Nihal Kothari, executive director, Khaitan & Co. He says, “The issue is how the benefit of input tax credit should be passed to consumers. While the GST rate reduction on products is fairly easy to pass, that is not the case with input tax credit. GST, as we know, is a pass-through tax, where one registered entity is dealing with the other through the value chain. It is therefore easy to determine input tax credit at company level rather than product level. If a product-specific approach to anti-profiteering is introduced, then granularity of information will increase, complicating matters.”
Industry sources say the antiprofiteering body may come up with specific guidelines by the middle of this month to help iron out differences. It is important to note that consumer goods companies have already passed on the last rate reduction announced on November 10 on products such as shampoos, detergents, air freshners and deodorants. The GST on 177 mass-use items was slashed to 18 per cent from 28 per on that day, with companies effecting a 7-10 per cent price cut subsequently.
“I see the current phase as a period of transition," says Sunil Kataria, business head, India & SAARC, Godrej Consumer. “The recent price cuts have to reach the consumer. While we have covered distributor stocks, the retail trade is vast and for the pricing change to reach the last mile, it will take time. We are advertising price cuts to create awareness.”
Sunil Duggal, chief executive officer, Dabur India, says he sees a bigger challenge in managing existing inventory, which has the old price. “Though we are distributing stickers to trade, for us to physically affix stickers on existing stock is difficult. That is a challenge,” he says.
Apart from advertising price changes prominently, companies are also engaging with retail trade to ensure the cuts are passed on effectively. Distributors working with companies have also been asked to step in and monitor existing as well as new stock.