Mumbai: Ahead of the roll out of the goods and services tax (GST) this Saturday, makers of snacks, including potato wafers and biscuits, are anticipating a hit on sales as increased tax under the new regime forces them to either increase prices or suffer a dent in margins.
Potato chip makers, for instance, will now be taxed at 12% under GST, up from the effective tax rate of 5% under the current VAT regime. This has made wholesalers and retailers of potato chips and wafers nervous about the anticipated hit on their margins owing to higher tax outgo, said Chandubhai Virani, founder and managing director of Balaji Wafers.
“Right now, wholesalers and dealers are taking lesser stock as the tax rate has increased from 5% to 12%," Virani said. “We will compensate our distributors, perhaps absorbing between 3% and 4% of the increased cost (from the switch to the new GST tax rate)," he said.
Balaji Wafers supplies to seven wholesalers and 700 dealers.
However, Virani is clear that he is not going to hike prices of his products. “We will divide the losses and move together," he said. “Maybe profits will fall a little bit, but there is no harm in that."
Biscuit makers are in for a hard time. Under the new regime, all biscuits (except those that contain chocolate) will be taxed at 18%. For biscuit makers like Parle Products, this affects margins of high volume, low margin glucose, milk, and Marie biscuits that poorer consumers buy, said Mayank Shah, category head for biscuits at Parle Products.
“Biscuits are a real problem, the differentiation between (types of) biscuits is gone," Shah said. “Usually, low price high nutrition (LPHN) biscuits that are priced below Rs100 per kilogram are consumed by the poorest of the poor. We have made representations to the government to put this category (of biscuits) outside the 18% tax bracket," he said.
“These rates will change the market dynamics. The unorganized sector will flourish and the government will not be able to tax it. Consumers will get access to poor quality, loose form biscuits," Shah added.
He pointed out that LPHN biscuits are a Rs9,000 crore market, making up 36% of the Rs25,000 crore overall biscuit market in India. Parle G, the company’s leading brand in this space, makes up about 40% of its revenues. “Parle G is more of a staple than a biscuit for a large number of consumers who start their day with a chai and a pack of Parle G," Shah said.
Although the company is lobbying with the government to change the tax rates of this snack category, Shah said Parle Products may ultimately have to effect a price hike. “With something like glucose biscuits, you are working with very narrow margins. There is no room to work around (and adjust margins)," he said.