Why FMCG firms are cautiously optimistic on GST

Lack of clarity on tax rate remains a concern

The Union Cabinet’s approval to the Constitution amendment Bill for implementing the goods and services tax (GST) earlier this week has paved the way for the Bill’s introduction in Parliament. This implies a boost for the long-pending indirect tax reforms. Yet, executives in India’s Rs 3-lakh-crore fast-moving consumer goods (FMCG) sector, who were earlier lobbying for implementation of GST, now are cautiously optimistic.

The reason: A lack of clarity on the tax rate under GST. GST speaks of a harmonised goods and services tax. But estimates suggest this harmonised, or revenue-neutral, rate will be 24-27 per cent. This, interestingly, is what had been recommended last month by the empowered committee of state finance ministers. This group, representing the interest of states, has been speaking to the Centre on GST.

Marico Chairman Harsh Mariwala says, “You have to bear in mind that stakeholders here are not the Centre and states alone. You also have consumers, industry and trade. If rates are high, these will lead to inflation which will be detrimental to consumers. Ideally, the revenue-neutral rate should be below 20 per cent. Earlier committees (formed to discuss and implement GST) had suggested the tax rate be fixed between 12 and 16 per cent. That would ensure competitive pricing of goods, so that there are no inflationary pressures.”

Godrej Group Chairman Adi Godrej says 27 per cent would be too high a rate and that he would rather wait for clarity on the matter. “There have been a few compromises. But there is no denying how critical the development is. Once all items are included and implementation is complete, we will see the full impact of GST,” he said. CavinKare Chairman & Managing Director C K Ranganathan also indicates he would prefer to wait for clarity. “That is the most important aspect as far as GST goes, besides, of course, the process of implementation. How will it roll out? Which products will be included or exempted? These are critical questions to which most stakeholders would be seeking answers."

Dabur’s Chief Executive Officer Sunil Duggal, says, “While GST is a positive development in the long-term, in the near-term, there are challenges. We are worried about the rates. If they are too high, we would have to pass it onto consumers, which, in this depressed market, will lead to demand erosion. We can't let that happen nor can we absorb steep rates because that would impact company financials. So, there has to be a clarity on rates plus the IT infrastructure for smooth rollout of GST.”

The Centre, for the record, had proposed to include petroleum under GST in the Constitutional amendment Bill, but not levy GST in the few initial years to address states’ concerns over loss of revenue.

Tobacco and alcoholic products have also been kept out of GST, for now. Emami Ltd Director Aditya Agarwal says: “GST was conceived with the idea of subsuming indirect taxes like excise duty and service tax at the central level and VAT along with local levies (such as octroi) at the state level. Its implementation will also lead to rationalisation of warehousing and lower logistics cost, and reduce delivery time of manufactured goods. I see this as a positive development, since multiple tax structures and paperwork affect ease of doing business.”