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Equity research on FMCG

Equity research on FMCG

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Published by siddiqueimtiyaz
the report contain the equity research on fmcg along with fundamental and technical analysis.
the report contain the equity research on fmcg along with fundamental and technical analysis.

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Published by: siddiqueimtiyaz on Aug 12, 2009
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07/10/2015

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Tax reforms

50

The government has gradually removed the restrictions on imports of
consumer goods in the country and also significantly reduced custom
duties. The domestic tax structure of these products, however, has
not been rationalized to provide level playing field for competition.
This is adversely affecting the growth of the FMCG industry and could
have far reaching adverse impact. The following taxation issues need
urgent attention of the government:

1) Extremely high incidence of tax on certain product categories

Some FMCG products such as shampoos, processed food, soft
drinks and toiletries containing alcohol attract high rates of excise
duty and sales tax. The total tax incidence in some cases is more
than 60 per cent of the cost or more than 30 per cent of MRP. Such
high tax incidence hampers growth of these product categories
besides encouraging manufacture of spurious products and
smuggling.

It is recommended that the total excise incidence of FMCG products
should not exceed 16 per cent in the case of non food items and eight
per cent in the case of processed foods. Similarly, the marginal rates
of sales tax, which is currently in the range of 10 to 25 per cent,
should not exceed 12 per cent.

2) Irrational domestic tax structure encouraging imports

Significant reduction in custom duty rates of consumer goods has
made imported product cheaper as compared to indigenously
manufactured products, due to irrational domestic tax structure. For
instance, goods manufactured in India suffer from cascading effects
of taxes on inputs as additional cost compared to imports.

The cascading effect of sales tax and local levies on inputs used in
domestic manufacture should be eliminated by providing either
MODVAT credit or by introducing notional VAT covering both central
and state taxes on an urgent basis.

51

Moreover, MRP-based excise duty is levied on a large number of
FMCG products. Countervailing duty on the same product when
imported is charged on CIF value. The MRP based assessable value
for excise duty does not allow abatement for post manufacturing
costs such as advertising and selling expenses whereas CIF value
considered for the purpose of import duty does not include costs of
these elements incurred subsequently by importers.

This differential basis creates unfair competition as tax incidence on
domestic manufacture could be considerably higher in case of those
products which incur significant marketing and distribution cost. There
is a need to bring parity in tax incidence between domestic
manufacture and imports by including all such elements of post
manufacturing costs while deciding the abatement percentage of
MRP based duty.

3) Inverted Duty structure for selected inputs

Duty on certain raw materials is higher or the same as compared to
finished products in which these materials are used. Such raw
materials include oils and chemicals like Soda ash, caustic soda and
LAB. In addition to customs duty, raw materials are also subject to
SAD/sales tax and octroi and therefore total tax incidence and cost of
indigenous manufacture goes up. The import duty on raw materials
needs to be rationalized so that it does not exceed 60 to 70 per cent
of the duty on finished goods.

4) Need for rationalization of taxes on processed foods

Processed food industry, with its vertical integration with the
agricultural sector has significant potential for employment generation
and economic growth. The existing tax structure and its high overall
incidence, however, has been hampering the growth of the processed
industry.

The increase in excise duty in last year’s budget from eight per cent
to 16 per cent has adversely affected the growth of processed foods
industry. It is recommended that marginal rate of excise duty on
processed foods should not be more than eight per cent and the
sales tax should be levied at four per cent.

52

5) Cascading effect of Special Excise Duty

The special excise duty introduced last year is not "cenvatable’’
except in the case of selected products. Most FMCG products
covered by tariff such as shampoos, ice creams and cosmetics are
subject to SED. This tariff also contains very wide definition of the
term "manufacture’’ which includes labeling, relabeling or conversion
of large packs into small packs. The levy of SED on such products
therefore leads to double taxation when goods are labeled or
converted into small packs after manufacture. It is recommended that
SED should be made "cenvatable’’; alternatively the term
"manufacture’’ needs modification , atleast for the purpose of SED by
excluding labeling, relabeling or conversion into small packs.

FDI Policy

Automatic investment approval (including foreign technology
agreements within specified norms), up to 100 per cent foreign equity
or 100 per cent for NRI and Overseas Corporate Bodies (OCBs)
investment, is allowed for most of the food processing sector except
malted food, alcoholic beverages and those reserved for small scale
industries (SSI). 24 per cent foreign equity is permitted in the small-
scale sector. Temporary approvals for imports for test marketing can
also be obtained from the Director General of Foreign Trade. The
evolution of a more liberal FDI policy environment in India is clearly
supported by the successful operation of some of the global majors
like PepsiCo in India.

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