Toiletries Makers In A Lather Over New Excise Formula

The government's decision to levy excise on cosmetics and toiletries on 50 per cent of their maximum retail price may have been provoked by its realisation that a relatively small amount of excise was being paid by most companies manufacturing these fast moving consumer goods (FMCG).

According to a notification issued last Thursday, excise duty on cosmetics and toiletries will be levied on a value calculated at 50 per cent of the maximum retail price from July 1. Earlier, excise was levied on the ex-factory price of the product.

Items to be covered by the new notification include perfumes, toilet waters, beauty and make-up preparations for the skin and hair, preparations for the skin and hair, shaving items and personal deodorants, bath oils and other bath preparations.

A quick study of top multinationals and Indian companies operating in the FMCG sector shows that most of them paid excise equivalent to about 4-18 per cent of their gross annual sales last year, even though excise duty on cosmetics and toiletries ranged between 20 per cent and 40 per cent in 1996-97. The government has been progressively reducing excise duty on cosmetics and toiletries in the last five years. Even the 1997-98 budget brought down excise duty on cosmetics and toiletries from 40 per cent to 30 per cent, while the excise duty on toilet soap, perfumed hair oil and bath oil was reduced from 20 per cent to 18 per cent.

The government's argument has been that the FMCG companies have been paying less excise by artificially depressing the ex-factory prices and showing a relatively large expenditure on advertising, promotion, distribution and dealership margins.

In this manner, the excise pay-out is reduced, since excise has traditionally been paid on ex-factory prices and not on costs incurred after the product leaves the factory gates. The new method of levying excise on 50 per cent of the maximum retail price is expected to discourage the alleged practice of overloading the price with post-manufacturing expenses and reducing the excise burden.

Even though the precise product-wise break-down of the FMCG companies' gross sales and other details on the exemptions enjoyed by them are not available to establish the government's contention, the ratio of excise paid to annual gross sales does reveal an interesting picture. For instance, Hindustan Lever paid Rs 529 crore of excise, which was only 7.42 per cent of its gross sales of Rs 7,121 crore in 1996. Dabur, whose annual gross sales in 1995-96 was Rs 562.41 crore, paid an excise duty of Rs 24.26 crore, a mere 4.31 per cent. Nirma's share of excise in its total gross sales was the highest at 18.76 per cent; it paid excise duty of Rs 90.92 crore on a gross sales of Rs 484.44 crore in 1995-96. The same year, Colgate-Palmolive's excise duty of Rs 73.60 crore was only 8.53 per cent of its gross sales of Rs 861.93 crore.

Similarly, Godrej Soaps paid an excise duty of Rs 47.54 crore, which was eight per cent of its total gross sales of Rs 590.76 crore in 1995-96. Procter and Gamble paid Rs 35.13 crore, about 10 per cent of its gross sales of Rs 366.28 crore in the year ended June 1996.

Company officials admitted that their excise burden would go up substantially following the new excise norms to be introduced from July 1.

They, however, said it was too early for them to indicate the precise financial impact of the new norm, and added that they were exploring various options in response to the excise notification, issued last Thursday.

One, they are examining if the additional excise burden could be absorbed by the company. If this path is adopted, their bottomlines would be adversely affected. Two, a proposal to increase prices of products as a result of the excise burden is under examination. An increase in prices will also be a difficult decision, as the cosmetics and toiletries market is facing an intense competition.

No company is as yet contemplating a legal recourse by questioning the government's right to levy excise on the retail sale price, instead of on the ex-factory price. Whether any company chooses this option or not will be known in the coming days.