The unanimous passing of the Constitutional Amendment Bill in the Rajya Sabha has paved the way for the biggest tax reform in India since independence – India is now well and truly on track to witness the implementation of GST in India. The dream of ‘One country-One tax’ and India becoming one market from an indirect tax perspective is just around the corner.
Historically, indirect taxes paid throughout the value chain from procurement, manufacturing, processing sales, advertisement, promotion had a bearing on the pricing of the products. A fundamental shift from the current indirect tax system to the GST regime should have a positive impact on pricing of the product, subject to the decision of GST rate of the products.
For instance, a typical consumer product such as a perfume or a hair oil, and white goods such as air conditioner typically attracts excise duty at 12.5% and VAT ranging from 12.5% to 15% depending on the state which makes it an effective rate around 26% to 28%. If the standard GST rate is agreed by the centre and states at 18%, there could be a reduction in the tax on sales of said goods, which should typically be beneficial to the customers if the tax benefits are passed on.
Additionally, for consumer products manufacturers, there could be tax savings on procurements on account of discontinuance of Central Sales tax, State entry taxes and reduction in non creditable taxes such as excise duty and Countervailing duty paid on traded products, VAT input tax retentions, CENVAT credit reversals on account of trading turnover.
Manufacturers, on the other hand, could pass on the benefits on account of tax savings on procurements and reduction in taxes on sales to the final consumer by reducing prices, or maintain prices and retain the benefits with the company. Various factors such as competitor’s pricing strategy, current market share, ability of the consumers to absorb the tax burden, would have a bearing on the pricing decisions to be taken by companies.
Many FMCG companies also have manufacturing units in Excise free zones located in Himachal Pradesh, Uttar Pradesh, North East States which currently enjoy excise holidays. While, at present, no decision has been taken on the treatment of excise free zone units under the GST regime, there is a possibility that the excise exemption schemes could be converted in to refund schemes. The tax treatment of excise free zones would be an area to watch out for and could have an impact on the FMCG sector.
Almost all manufacturing companies have warehousing on a State-wise basis on account of VAT laws. The stock transfer model has been adopted by companies in the FMCG industry to save on the CST costs applicable on interstate sale of goods which is not available as a credit to the customer. Stock transfer of goods which currently do not attract VAT / CST (if despatched against Form F), will attract IGST under the GST regime. While the IGST is available as a credit at the consignee location, there would be a working capital impact on account of the IGST paid on stock transfers for the inventory holding period. As an alternate model, in case of direct interstate sale of goods from factory to customers, IGST would be payable which would be creditable to customers. Hence, companies would need to re-examine the existing distribution network in order to optimise the tax costs, working capital impact, whilst maintaining the customer service levels.
Introduction of GST will also warrant upgradation and modification in the IT systems of the companies in terms of recording of transactions, changes in IT masters, tax coding systems, invoicing formats, formats of sales and purchase register in order to ensure that the information captured is in line with the statutory requirements under the GST law including registration requirements, invoicing, computation of taxes, filing of returns, maintaining statutory records, and generating reports and data required for assessments and audits undertaken by the tax authorities.
Only time will tell what pricing strategies are adopted and how companies leverage the benefits that GST bring to the table. One thing is for sure – eventually, the consumers should stand to benefit. It should be case of sooner or later.
Tax Partner, EY India