Fast Moving Consumer Goods

Two years ago, on 5th June, a catastrophe struck the nation. 9 variants of Maggi noodles were withdrawn and recalled, production and exports were stopped and Maggi noodles was banned.

It was off the shelves. Questions were raised about the level of lead and MSG in Maggi. The Uttar Pradesh food safety body said Maggi was unfit for consumption. “Dangerously high” levels of lead as well as MSG were found in the beloved instant noodles. The Delhi Government banned Maggi for 15 days while the other states ordered tests. For the next three months, there was uncertainty all around and the aam janta was grief stricken. The Confederation of All India traders demanded action against Maggi’s brand ambassadors and the officials who had approved the product. Soon, Nestle had been prohibited from selling the noodles. Chaos clouded one of India’s most popular FMCG brands, and the country was split in moral essence.

Finally, on August 13th 2015, the frenzy ended as Bombay High Court lifted the ban on Maggi noodles. The noodles were missed while Maggi was battling with various authorities. Alternatives had come to the forefront. But, they failed to stimulate our taste buds like Maggi did. Five months after Nestle was banned from selling Maggi in India, it was back on the shelves. A few days after the ban was lifted, many people were cheering and celebrating with their first Maggi in a long time. It was back, although something had changed.

The price of ₹10 that had been constant for more than 10 years had changed. There was a hike in the price by ₹2. It would be wrong to say that the price hike didn’t affect Maggi. For the first time in 30 years, Nestle had incurred a heavy loss. Despite this, people have been loyal to Maggi and it is bearing results (these people include the team of GST Edge as well). The sales charts at Nestle are showing an upward trend again.

Maggi falls in the category of fast-moving consumer goods (FMCG). For the ones who weren’t aware about the existence of a term like this, Fast Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) refer to products that sell quickly, in higher volumes, and have a short shelf life. They are generally cheap. FMCG include non-durable items like soft drinks, toiletries, over the counter drugs and many other consumables.

As I mentioned earlier that everyone at GST Edge loves their maggi. Being an employee of a GST-based firm made me wonder how GST will affect Maggi and other FMCGs. Hence, after seven articles and a comprehensive research, I have unearthed quite a few things about how GST will impact FMCG.

For starters, 70% of all goods are set to become cheaper. FMCG goods are currently taxed at 22-24%. This rate is going to come down to 18% and the major players of the industry have welcomed this. Relief also comes in the form of availability of input tax credit. In the current tax situation, input tax credit is not available for taxes like CST, CVD and SAD.

 

 

It is also certain that the logistics cost which is currently 2-7% is going to drop by 1.5% and cost reduction will also come in the terms of transportation and storage of goods. The proposed e-way bill for transporting freight worth more than ₹50,000 will ensure that there are less delays at check points. No CST, availability of input tax credit and smoother supply chain management will lead to reduction in costs.  You know what this means, don’t you? (Hint: drop in prices). The stock transfer part is slightly tricky. It is still unclear how intra-state stock transfers will be treated. However, Stock transfers outside the state will attract GST. The value of goods shall be considered as the transaction value (i.e. the price that is paid or is payable for supply of goods). Since there is no consideration in stock transfer, this provision cannot be implemented.

GST valuation rules also state that if the transaction value is not available, then the value for the good or service would be considered as the transaction value. This doesn’t have any effect on the end consumer but for the businesses it will lead to working capital blockage. The money that could have been used for other productive tasks will be used for paying taxes on stock transfer. This refers to working capital blockage.

So far, so good.

Nestle, ITC, Hindustan Unilever, Dabur and many other companies have their warehouses set up in places like Himachal Pradesh. Such places often enjoy tax holidays or tax exemptions and it is beneficial for the companies to set up their warehouses here, for obvious reasons. It remains to be seen whether these places will enjoy tax holidays or exemptions in the future as well. The companies are getting anxious by the day owing to a lack of notification about the same. If the tax holidays or exemptions are not carried forward, it is likely to affect the costing of the products.

Clarifications are also needed for the determination of service recipient. FMCG companies provide and receive services at many locations. In certain spheres like marketing and advertising, it is difficult to determine the location of the service. Moreover, GST is still unclear about who will be considered as the service provider or recipient in such cases.

Overall, much to our relief, FMCG companies will benefit with the onset of GST.