Under the GST's ambit: Hindustan Unilever move might trigger more action

FMCG, pharma firms among those likely to voluntarily disclose tax benefits as anti-profiteering body gets stringent

Companies in the fast moving consumer goods (FMCG) and pharmaceutical spaces are likely to be first in line to voluntarily disclose benefits under the goods & services tax (GST), the move coming as the anti-profiteering body of the government gets stringent.

Hindustan Unilever (HUL, the country’s largest consumer goods company had last week opted to disclose Rs 1.19 billion of GST benefits for the months of November and December 2017. HUL had said these had accrued after the decision to lower the GST to 18 per cent, from 28 per cent, on daily-use items. Companies were given till November 15 to pass on the reduced rate to consumers, which HUL said it was unable to do on some pipeline stocks.

“It was important for us to act decisively for the benefit of consumers. We have, therefore, offered to pay the amount suo motu to the government’s consumer welfare fund,” Sanjiv Mehta, managing director and chief executive officer of HUL, said a day after the Directorate General of Safeguards (DGS) had slapped a notice on the company. 

In a conversation with this publication, Ullas Kamath, joint managing director at Jyothy Laboratories, said HUL's voluntary disclosure could trigger action among other companies. “This is the first time something like this has happened,” he said. “This is a novel way of handling the issue of rate reduction. Companies, at least those that have had trouble passing on reduced rates, could consider this option.” Why pharma and FMCG companies are likely to be the first to consider this is because of the nature of their business. Nihal Kothari, executive director, Khaitan & Co, explains: “These businesses are typically maximum retail price-led and any reduction in GST rates has a straight impact on the final price. It also becomes easy for the government to track how the product price has moved before and after rate reduction, compelling companies to act quickly.”

FMCG and pharma companies says they have no control over stock once it leaves their godowns or depots. Yet, say executives privately, the government has insisted firms do all they can to ensure reduced rates are passed on to consumers. "The government’s attention on anti-profiteering has been largely directed at companies over the past few months. The feeling (in government circles) is that the buck stops with them (companies), pushing the latter to go the extra mile in driving home the point of reduced rates to stakeholders," says the chief executive of a top consumer goods entity.

Sumit Malhotra, managing director, Bajaj Corp, says many companies, including his own, have provided trade discounts and incentives, educated dealers, distributors and retailers of the need to ensure smooth passage of reduced rates. And, advertised in publications to convey to consumers the lower prices of their products. “In some cases, firms have also resorted to sticking labels (on existing stock) to convey the message. Yet, there could be inventory that could be left out of all this,” he says.

In such a case, voluntary disclosures help, say experts. Beside indicating that companies are serious about passing on GST benefits. “It is an interesting development (HUL’s disclosure) and will push firms which have been slow on the issue of rate reductions to take it up seriously,” says Kothari. “The government has also been careful here (on HUL’s disclosure), saying it will study the matter carefully in the absence of legal provisions.”

Following Suit

• HUL’s move to voluntarily disclose GST benefits to the govt could find takers
• Pharma and FMCG firms are likely to consider this option
• This is because the firms in these sectors have to deal with large pipeline stocks, making it difficult to pass on reduced rates on all inventory
• At the same time, the buck of rate reduction stops with firms, prompting the anti-profiteering body to slap notices on them
• Firms say voluntary disclosure will makes things a little easy for them