Mumbai: Fast moving consumer goods (FMCG) companies’ attempts to move their consumers to more premium brands may be impacted 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 1 July, 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.
GST Council’s next step: Ensuring tax benefits are passed on to consumers
“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 India’s largest consumer packaged goods companies including 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 18-19 May 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 Pricewaterhouse Coopers 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.
GST rates: Financial services transactions to become marginally dearer
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.
Hindustan Unilever Ltd (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 company’s biggest business segments.
“The rates are broadly in line with what we expected basis the strategy outlined by the government barring in laundry detergents and household care products where the rate is at 28%, which is in contrast to other daily necessity products such as soaps and toothpastes which are at lower slab," an HUL spokesperson said in an email.
A major part of HUL’s premiumization strategy is upgrading consumers to liquid soaps (shower gels) and laundry detergents. HUL defines premium products as those products priced at 120% of the average price of the category.
In a press briefing last Wednesday to declare HUL’s quarterly results, managing director and chief executive Sanjiv Mehta had attributed the growth in the home care segment to its premium brand Surf Excel. “Surf Excel has been doing very well, growing in double digits," he said. Margins for the home care business in the fiscal fourth-quarter grew to 12.9% from 8.7% year-on-year.
However, at the same press briefing, HUL chief financial officer P.B. Balaji had said the company expects to pass on benefits of lower tax rates to consumers.
Godrej Consumer might see margin growth falter as hair creams, dyes and lacquers are placed in the highest tax bracket of 28%. In the quarter ended March 2017, the company’s India sales grew 10% mostly through the 13% growth in hair colour brand Godrej Riche Crème, Mint reported on 9 May.
This may also hit margins for Marico Ltd’s recently acquired male grooming brand Beardo, that sells hair and face care products including waxes and creams that will also be taxed at 28%. The company had acquired a 45% stake in Beardo and reaffirmed focus on male grooming as part of its growth strategy for the next three years, Mint had reported on 9 May.
Godrej Consumer Products declined to comment. Marico did not immediately respond to an email questionnaire on GST rates.
There are other uncertainties as well. Analysts say the industry is expecting traders will reduce their stock as they wait for clarity on how they can claim credit for input tax, a concern that HUL, the country’s largest consumer goods firm also raised.
In its email statement, HUL said it needs “early clarification" on “formal communication on cutover dates, reimbursement of fiscal, operational items like GST return formats etc.", along with clarity on the “amount of presumptive credit available" to minimize the amount of downstocking as distributors cut losses.