Influence Of ‘GST’ On The Cosmetics Industry

In India

Abstract

The Indian cosmetics market has seen major changes in terms of user perception
and product availability over the past few years. There have been market shifts
during this period and the past few years have seen the market take further
momentum. According to figures given by the Confederation of Indian Industries
(CII), the total Indian beauty and cosmetic market size currently stands at US$950
million and showing growth between 15–20% per annum. The increasing market
size is the direct result of the changing socioeconomic status of the Indian
consumers, especially women. Higher paying jobs and increasing awareness of the
Western world and beauty trends there have served to change the tastes and
customs of the middle class and higher strata of the society, with the result that a
woman from such social strata now is more conscious of her appearance and is
willing to spend extra cash on enhancing it further. Today increasing numbers of
women, especially from the middle-class population, have more disposable income
leading to a change in cosmetic and skin care product consumption. The objectives
of this research study are to present an overview of cosmetic Industry and to
examine consumer behaviour towards cosmetic products. Research study was
carried out in the commercial capital of Madhya Pradesh-Indore city, popularly
known as mini Bombay. As this study is limited to Indore city, the same cannot be
generalized in a border sense.

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Introduction

Cosmetics are substances used to enhance the beauty of the human body. It
implies psychologically that you are compensating for something you do not have.
Presently, the governing legislation in case of cosmetics in India is the Drugs &
Cosmetics Act, 1940 which defines a cosmetic as ―any article intended to be
rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applied
to, human body or any part thereof for cleansing, beautifying, promoting
attractiveness, or altering the appearance, and includes any article intended for use
as a component of cosmetic. The Indian cosmetic industry has witnessed rapid
growth over the last decade. In that time the range of cosmetic and beauty products
in India has widened tremendously. Indian competitors have begun to manufacture
products to cater to an international need. Herbal cosmetics from India have a great
demand in the overseas market and many cosmetic products that are manufactured
in India today are supplied to international suppliers of branded cosmetic products.
New facts that have been reveal that the industry of cosmetic products in India is
growing at an average rate of almost twenty per cent annually; this increase is
attributed to two main factors. The first being the increase for the demand in Indian
cost-effective products and the second being the increased purchasing power of the
average Indian. There are also many reasons for the increased demand for cosmetic
products in particular. With the introduction of satellite television and a wide array
of television channels as well as the internet, the average Indian consumer is
constantly bombarded with advertisements and information on new cosmetic
products which often translates into the desire to purchase them. A boom in the
Indian fashion industry has been linked to the increased awareness of Indian
people about their appearances & consequently contributed to an increase in the
demand for cosmetic products. Consumer behavior encompasses a vast area

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including consumption pattern, consumer preferences, consumer motivation, and
consumer buying process & shopping behavior. The purchase decision is
influenced by various factors such as social, cultural, demographic, personal,
economic etc. So for effective marketing, the marketer must know the basis of
decisions taken by customers.

Current Scenario

With disposable incomes increasing in India, the country is poised to become a

manufacturing hub for global cosmetics luxury brands over the next few years. The
report referred to the 'core strengths' in India's manufacturing sector, and said
manufacturing of luxury items could become a $500-million industry in the present
period. Global brands like Louis Vuitton and Frette are already looking at India as
a manufacturing base for their products, while others are sourcing their
requirements from India," the report said. Moreover, the study said, cost
advantages, particularly in labour-intensive sectors like leather and accessories
would goad manufacturing of foreign brands in the country. The study suggested
that in order to promote the luxury cosmetics market, three initiatives were
required - organizing the sector, promoting standardization and branding
organization, and partnerships with international fashion and luxury associations.
"Corporatization of the luxury cosmetics sector will bring along with it concepts of
organized and innovative marketing, leading to large investments, employments
and generating additional revenue streams,” Top leading companies are Lakme,
Colgate Palmolive India Ltd., a subsidiary of Colgate Palmolive Company, USA,
Emami Limited, Revlon, Oriflamme Cosmetics, L’Oreal Group, and Avon
Products. London range of cosmetics, According to a source at L‘Oreal India,
women in the age group of 30 and above are getting very selective about the type
of products they choose. These women also are more open to buying higher-priced

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products. Men are emerging as big buyers of cosmetics and skin care here. But
now players such as Kryolan and MAC have direct presence in Indian Market with
focusing on Brand Positioning thru pricing of the product and the nature of product
usage. Products falling under the price range of Rs 45 to Rs 200 are in the mass
market category. The middle market price can range from Rs 200 up to Rs 800. In
the high-end market, pricing can range from Rs 800 to about Rs 5000. Finally there
is the premium range of products where the pricing can touch up to Rs
35,000.Today, it is important for big brands to define different brand positioning to
retain the right market share. Brands such as Lakme and Color Bar are being
pushed as mass market products and focus on younger women with lower buying
power. Revlon, Chambor, Diana of London that make the mid-range while Clarins,
MAC and Lancôme make the high end. La Prairie touches the premium end of the
market. Besides L‘Oreal, Unilever, through its Indian arm Hindustan Lever,
Procter & Gamble, and most premium and high-end brands prefer to come to the
country through distributors. India presents a big opportunity for global cosmetic
vendors selling color cosmetics and specialized skin care products in the market.
Today, these product segments are showing impressive growth rates. In skin care,
the most popular are anti-wrinkle, anti-blemish and skin-whitening products .Other
specialized products need more customer awareness. The range of products sold at
Men and boys includes face washes, cleansers and scrubs, facial clay, lava and
mineral mud masks, purifying and energizing masks, facial moisturizers,
exfoliation scrubs, detoxifying exfoliating masks, anti-breakout gels, pore-reducing
serums, pre-shave oils and guards, hot towel pre shave treatment, electric pre-
shave optimizers, shaving creams, foams and lathers, aftershave creams, soothers
and moisturizers and after-shave balm, among others. Worldwide cosmetics market
top ten (2008) includes United States, Japan, Brazil, China, Germany, France,
United Kingdom, Italy, Russia and Spain. The cosmetic industry worldwide seems
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to be continuously developing. Many famous companies sell their cosmetic
products online also in countries in which they do not have representatives.

Significance Of Cosmetics In Human’s Life

Appearance plays a significant role in making the first impression. Cosmetics help
to make a woman and men feel more confident and assured about their image.
Cosmetics are substances that are used to improve appearance. An array of
cosmetics is used by people all around the world. These include skincare creams,
powders, lotions, nail polishes, lipsticks, colored contact lenses, eye and facial
makeup, hair colors, deodorants, hair sprays and gels, bath soaps, bath salts, bath
oils, baby products and many more. This wide variety is generally divided into two
types: decorative cosmetics and care cosmetics. Today, certified organic cosmetic
products are very popular. They are made up of organic and natural ingredients.
Many cosmetics contain vitamins such as A, D, E and K. These vitamins are
essential for healthy skin and hair. There are also varieties of shampoos and
conditioners available, which keep the hair clean, soft and healthy. The wide range
of hair colors available today also helps to modify and highlight the hair in color
and shade of one’s choice. Cosmetics can bring about a huge change in personality.

Influence Of GST On Cosmetics Industry

The cosmetics sector is an important contributor to India’s GDP cosmetics

constitute a medium part of consumers’ budget in all countries. Indirect Taxes
would be subsumed (except for few taxes such as Stamp Duty) and hence it is
expected that it would result in a simpler tax regime especially for industries like
cosmetics Apart from simplification of tax compliances, the rate of tax will also
have a significant impact on the cosmetics sector. GST would have an impact on
the pricing, working capital, contracts with vendors and customers, ERP systems,

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processes, internal control and accounting. Another important impact of GST on
COSMECTICS companies would be the opportunity to review the supply chain
and move to a supply chain based on business parameters. Hence, GST may bring
certain changes in every aspect of the business. The article uses an exploratory
research technique based on past literature from respective journals, reports,
newspapers and magazines covering wide collection of academic literature on
Goods and Service Tax. According to the objectives of the study, the research
design is of descriptive in nature. Available secondary data was extensively used
for the study. The objectives of the paper are, focused on about Goods and Service
Tax and its impact on the cosmetics. And also examine Key Takeaways of the
Model GST. With the implementation of Goods and Service Tax, cosmetics sector
would really change. GST will alter the present system of production-based
taxation to a consumption-based one. cosmetics sector is the major taxation
contributor both direct and indirect in the economy. The multiplicity of the taxation
influences the company’s decision on manufacturing location and distribution of
Goods.

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The current Indirect Tax regime in India offers for a complex tax environment due
to multiplicity of taxes, tax cascading and elaborate compliance obligations.

Under the proposed GST regime, various Indirect Taxes would be subsumed
(except for few taxes such as Stamp Duty) and hence it is expected that it would
result in a simpler tax regime especially for industries like COSMECTICS. Apart
from simplification of tax compliances, the rate of tax will also have a significant
impact on the COSMECTICS sector. Presently the peak tax costs for industry
players amount to approximately 27% (i.e. Excise Duty of 12.5 % and VAT
ranging from 12% to 15 %). Under the GST regime, it is proposed that the revenue
neutral rate would be in the range of 17% to 19%, thereby resulting in significant
benefit for the sector.

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2016, a major milestone has been achieved and we have certainly moved a step
closer to GST. India finally seems to be on the cusp of implementing this much
awaited Tax Regime. In the light of the above developments, industry would now
need to analyses the provisions of the draft law in detail and its impact on their
business. This is essential to ensure that, timely representations are made to the
Government as well as to identify key implementation requirements as part of the
preparations for transition from the existing indirect tax regime to GST regime.In
the ensuing paragraphs, we have sought to identify the key issues arising from the
Model GST Law as may be relevant for the COSMECTICS Industry.

Indian Cosmetics Industry

 The Indian COSMECTICS industry represents nearly 2.5% of the country’s

GDP.

 The industry has tripled in size in past 10 years and has grown at ~17%
CAGR in the last 5 years driven by rising income levels, increasing
urbanization, strong rural demand and favorable demographic trends.
 The sector accounted for 1.9% of the nation’s total FDI inflows in April
2000-September 2012. Cumulative FDI inflows into India from April 2000
to April 2013 in the food processing sector stood at 9,000.3 crores,
accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and
toiletries, accounting for 0.32% of overall FDI at 3,115.5 crores.
 India's labor cost is amongst the lowest in the world, after China & Indonesia,
giving it a competitive advantage over other countries.

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 Unilever Places $5.4 billion bid for a 23% stake in Hindustan Unilever which is
the largest Asia Pacific cross border inbound merger and acquisition (M&A)
deal so far in FY’14 and is the fifth largest India inbound M&A transaction on
record till date.
 Excise duty on cigarette has been increased in the Union Budget for 2013-14,
which would hit major industrial conglomerates like ITC, VST Industries in the
short term.

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Cascading Effect Of Taxes
Just when the beauty industry was getting back on track after the demonetization
announcement of 28 percent GST on cosmetics and 18 percent on services
provided by salons has seen a considerable decline within the first week of its
implementation. Earlier, there was a 14.5 percent tax on cosmetics. From that to 28

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percent is an enormous hike. Currently, a tax of 22% including excise duty and
other taxes are levied on products such as toothpaste, hair oil, and soap but after
GST a tax of 18% will be imposed. Skin care products and shampoo have been put
in 28% tax category while Vermilion, bindi, and mascara have been left out. As far
as sanitation is considered, a tax of 12% will be levied despite the demand of
making it tax-free. Read on about the effect of GST on beauty products.

Challenges Faced By Beauty Industry

According to industry reports, most of the companies in the Indian business

industry do not have natural exposure or access to information of updated GST tax
structure or its benefits in a user-friendly way. This lack of data has left many
salon owners incapable of taking advantages of the tax scheme available for them.
Another factor is that the contributions to their woes lie in the fact that salon
owners are ending up with the increase in the tax hit from 12 percent to 28 percent
on their cost of goods just with the limited understanding of the system, by not
collecting GST on their sold services.

However, according to the industry experts, the salon and the beauty industry in
the country can significantly benefit from the GST regime regarding overall
industry growth via Input Tax Credit – a credit mechanism that allows businesses
to claim tax relaxation on the goods purchased by them. As stated previously, like
every taxation model, GST also has pros & cons. In the case of the salon business,
GST is proving to be a benefit for them.

or instance, before GST, when 12.5 percent VAT was levied on the cost of goods
and services, in India the salon business was unable to get tax input advantages
from the service tax on the sale of product and services, which was 15 percent.

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However, salon owners can now access input tax credit under GST, which roughly
counts to 2.5 percent benefit if calculated under the previous structure and 5.6
percent under the new system. This is due to the increase in tax slab from 12.5
percent VAT to 28 percent GST on different beauty products.

Moreover, unlike the previous system, wherein the service industry could never
enjoy the tax input benefit from a sale of the services because of mismatch of the
multiplicity of taxes, beauty and salon service providers can now enjoy tax benefits
under the new unified taxation regime.

Beauticians And Make-Up Artists Will Feel The Heat

It isn’t only the beauty products that has taken a setback. Joana Shah, who
purchases cosmetics on bulk for her beauty salon, says, “If I buy a lipstick
for `350 after paying GST, I will have to sell that for `400 to the customer. I
end up making a profit of only `50 on the total cost, whereas earlier I would
easily make a profit of `100-150 on the same product.”

And it doesn’t end there. Make-up artists in the city are also facing the heat
due to GST. Talking about the increase in the remuneration that make -up
artists are charging now, Meghna Butani, make-up professional says,
“Earlier, I used to charge a 15 per cent service tax. Now, even if the tax has
gone up to 18 per cent, it gets nullified as there are many clients who insist
on cash dealing, which goes unbilled.”
With tax on services going up to 18 per cent and 28 per cent on cosmetics,
beauty salons are also struggling to maintain their customers. Shubha
Narangi, who owns a beauty salon in Wadala, says, “The tax high may not
seem too steep at first. But just one service is enough to make a client feel
the pinch. For instance, a woman ends up paying `54 for eyebrow threading
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which once cost `40, this is bound to make a client think twice about going
to a salon.”
Vibhangi Mohta, co-owner of a salon franchise in the city, adds, “One
cannot discount the fact that our business depends solely on the products we
purchase in bulk from beauty shops. If the rates there increase, we will have
no choice but to step up our prices too. So if a branded facial costs `1,000,
the client pays `1,180 for the same.”

Objectives Of The Study

The paper uses an exploratory research technique based on past literature from
respective journals, reports, newspapers and magazines covering wide collection of
academic literature on Goods and Service Tax. According to the objectives of the
study, the research design is of descriptive in nature. Available secondary data was
extensively used for the study. The objectives of the paper are:

1. To study about Goods and Service Tax.

2. To review its impact on COSMETICS .
3. To examine Key Takeaways of the Model GST.

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Key ASPECTS OF GST

Input TAX CREDIT Scope

The definition of capital goods has been drafted on the same lines as in the existing
CENVAT Credit Rules. Accordingly, Input Tax Credit will be allowed only of
those goods falling within specified chapters of the Model GST Law. Further, the
definitions of inputs and input services also provide for exclusions.

Therefore, it appears that even under GST, restrictions on Input Tax Credit will
continue. Further, a nexus of goods and services received is also required to be
established with outward supplies. Hence, the industry needs to represent for a
broad based credit mechanism.

Reconciliation Of Inward And Outward Supplies

If there is a mismatch between the details of outward supplies uploaded on the

GST network by the vendors and the inward supplies uploaded by the recipient,
such mismatch will be communicated to the recipient.

If the mismatch is not rectified by the vendor in the month of communication, the
recipient will be liable to pay the differential GST along with interest, in the
subsequent month. This provision places the liability for non-compliance on the
recipients, i.e. the COSMECTICS companies, as against their vendors.

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Area Based Exemptions Under The Excise Legislation and State Industrial
Policy
The first discussion paper on GST had stated that, area based exemptions under the
Excise legislation and incentives under the State Industrial Policies should be
converted to a tax refund mechanism. However, the transition provisions
prescribed under the Model GST Law do not provide for the treatment of the said
exemptions/ Incentives.

Further, the valuation provisions envisage that, subsidies should be included in the
transaction value. This would impact the benefits available to the industry.

Transition Provisions For Traded Goods

The transition provisions provide that the credit balance which was admissible
under the present regime would be carried forward under GST.

In case of stocks of imported finished goods, Countervailing Duty is not

admissible under the present regime, and in case of goods procured from contract
manufacturers, Excise Duty credit is also not available. Accordingly, based on
these provisions, under the GST regime, such stocks would suffer double taxation.

Taxability And Valuation Of Stock Transfers

The charging section of the IGST Act provides for the levy of IGST on the supply
of goods made in the course of inter-state trade or commerce. Further, as per the
Model GST Law, the term ‘supply’ includes transactions between a principal and
an agent. Schedule-1 of the Model GST Law deems any supply between two
persons without consideration as a ‘supply’. It is expected that there would be State

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wise registrations for CGST, SGST and IGST. It seems that each registration in a
State would be treated as different persons.

Taxability of Free Supplies

Supply of goods between persons without consideration is deemed to be a ‘supply’.

Accordingly, stock transfer of promotion materials/free samples will be subject to
GST. Subsequent supply of the said promotion materials to stockiest/end
customers will also attract GST. The valuation of such samples/ materials will be
as per the GST Valuation Rules, i.e. the transaction value of goods of like kind and
quality or the cost of sales. Under the present regime, free supplies are not subject
to VAT. Hence, promotion expenses of COSMECTICS companies will increase
under the GST regime.

Discounts

Discounts/ incentives provided after the supply of goods will be excluded from the
transaction value, provided the same is known at or before the time of supply of
goods, and is linked to the invoices for the supply of goods. Further, discounts at
the time of supply are excluded from the transaction value, only if it is in the
course of normal trade practice and is disclosed on the invoice.

Discounts provided under secondary market schemes will therefore not be eligible
for an exclusion from the turnover.

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Major takeaway features

1. The Cosmetics Industry should file representations to the Government on the

key issues arising out of the Model GST Law, as discussed above.
2. Some important action points arising from the Model GST laws are as under:

Analyze the impact of GST on business operations such as extent of costs
savings in procurements, review procurement contracts, impact on free
supplies, discount schemes, impact on product pricing, and the overall
financial impact of GST.


Review impact of place of supply provisions on procurement and
distribution, and ascertain the extent of credit utilization and blockage, if
any.


Review the procurement and distribution model and evaluate options to
move to an efficient supply chain.


Changes in the mechanism of utilization of Input Tax Credit will require
effective vendor management. Businesses will need to ensure that their
vendors are compliant, by applying appropriate commercial safeguards such
as release of payment only after the vendor has uploaded the invoice on the
GSTN, or the possibility of vendor consolidations.


Review arrangements with group of companies and the impact on valuation
for inter-group transactions.

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
Review the impact of GST on business processes and ERP systems, and
prepare a high level transition plan.


Ensure that Input Tax Credits are duly reported on a regular basis in the
relevant returns so as to eliminate loss of credit on transition to GST.

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Conclusion

The merging of multiple tax structures to one mother structure, i.e. the GST can
eliminate several challenges that tax payers had to face in dealing with multiple tax
authorities. Thus, over all, as rightly projected by industry experts, it can be
concluded that GST is here to simplify things for service providers, and make the
overall business process more efficient in the future.

More over the gst rates of the cosmetics products can be reduced hence price after
gst will not increase and maintain the same price. Also after GST there is increase
in the revenue from this industry hence there would be income more than expected
so government should take steps to reduce the tax rates which would even increase
the sales in this sector. As this industry comes under FMCG products hence there
would be a heavy need of these products hence keeping the tax rates lower will
facilitate the people.

GST will alter the present system of production-based taxation to a consumption-

based one. With the implementation of Goods and Service Tax 30% is Household
and Personal care. COSMECTICS sector is the major taxation contributor both
direct and indirect in the economy. The multiplicity of the taxation influences the
company’s decision on manufacturing location and distribution of Goods.
Cosmetics companies set their manufacturing units and warehouses where they can
avail tax benefits. To transfer the stock from the warehouses among the states they
have to pay taxes. So, GST would surely impact on cosmetics sector as taxes affect
the cost to the company.

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