Sales of premium brands at FMCG firms may take a hit
MUMBAI: Fast moving consumer goods (FMCG) companies’ attempts to move their consumers to more premium brands may be hurt by the decision to place pricier products in the highest goods and services tax (GST) slab of 28%, said Dharmesh Panchal, partner, indirect tax at audit firm PricewaterhouseCoopers.
Under GST, which takes effect on July 1, items of daily use such as tooth pastes and hair oils will be taxed at 18%, while products such as shampoos and hair creams, chocolates, and instant coffee will be taxed at 28%.
A report by equities brokerage Nirmal Bang titled GST— Impact of New Rate Structure said “too many goods” were placed in the highest tax bracket.
“We see a positive (impact) for commonly used FMCG goods like soap, toothpaste and hair oil (but this was largely expected) but negative one for others that are not commonly used where tax incidence seems to have increased from 24% to 28% (not expected)”, the report said, adding the impact will be “marginally negative” for the largest consumer packaged goods companies like Hindustan Unilever Ltd, Godrej Consumer Products Ltd, Marico Ltd, Emami Ltd, and Gillette India Ltd.
The government appointed GST Council headed by finance minister Arun Jaitley decided goods and services rates under five tax slabs during a two-day meeting on May 18-19 at Srinagar. These tax slabs were nil, 5%, 12%, 18% and 28%, announced along with a list of goods in each slab over the two-day period.
“There are pockets of benefit as some FMCG goods have been moved from 28% to 18%, but a bulk continues to be at 28%,” Panchal of PricewaterhouseCoopers said. “Oral care will benefit because rates will come down”. However, Panchal said that products such as chocolates, aerated water and shampoos will all be taxed at 28%.
“The government policy has been to keep GST revenue-neutral (meaning the overall tax revenue collected remains the same) and have tried to keep goods of mass consumption at lower rates,” he said.
While GST rates will reduce prices of low-margin, high-volume goods like soap bars and toothpastes, it may affect sales of more premium products that are now placed in the 28% tax slab.
HUL, the country’s largest packaged goods firm, stands to benefit from the lowered tax on soap bars and detergents: home care and personal wash are two of the biggest business segments.