Stinker For Toiletries Units

This section incorporated in CEA through Finance Act 1997 has robbed off the gains offered by the much published sops of the union budget 1997-98. Major scrips have reacted as a result.

The reduction in the excise duty on cosmetics and toiletries from 40 per cent to 30 per cent and on perfumed hair oil, bath oil and toilet soap from 20 per cent to 18 per cent in the budget has effectively been nullified by the new norms.

This amendment to the existing section 4, considers the maximum retail price (MRP) as the basis for levying excise. For toiletries, the excise has been pegged at 50 per cent of MRP, though it could differ for other commodities.

The amendment, therefore, removes the advantages offered by the prevailing norm of excise duty on the basis of ex-factory prices. Since this price calculation excludes expenditure incurred on local taxes, transport charges, commission payable to dealers, advertisement expenses, delivery, packing and forwarding costs etc, it considers only the sales price at the point of manufacturing.

The impact will be maximum for only those players whose promotional expenditure is substantial and the premium brands which command a very high MRP.

But the low excise to sales ratio of major companies cant be totally accounted by the inflated promotional charges, as suggested. Major promotional expenses hardly constitute 10 per cent of the total expenditure. On the other hand, raw material cost forms the single largest expense, around 40 per cent, followed by purchase of traded goods i.e. 20 per cent.

Lesser duty paid by the players in this segment can in fact be attributed to the sizeable portion of traded goods in proportion to the total sales.

As such the key factors will be product mix, share of traded goods to total sales, break up of various expenditure in deciding the actual impact.

Hindustan Lever, however, is likely to benefit from the merger of Brooke Bond, since the merger has led to a reduction in the share of personal products, soap and detergents as a proportion of total sales from 71 per cent in 1995 to 54 per cent in 1996. It also outsources sizeable portion of its goods - the ratio of purchased goods to total expenditure stands as high as 24 per cent.

On the other hand, Lakme which derives 97 per cent of its turnover from perfumery, cosmetics and toilet preparations will be affected largely.

The bottomline is that for those whose 50 per cent of MRP is less than ex-factory price will be benefited by this new section, the others will have to bear the extra burden.