TABLE OF CONTENTS

INTRODUCTION

GST ON BISCUITS

BISCUITS INDUSTRY IN INDIA

MARKET OF BISCUIT INDUSTRY OF INDIA

BISCUIT INDUSTRY: HISTORY AND CURRENT SCENARIO

IMPACT OF GST ON BISCUIT INDUSTRY

IMPACT OF GST ON FMGC SECTOR

CONCLUSION
INTRODUCTION

The Goods and Services Tax (GST), “the biggest reform in India’s indirect tax structure since
the economy began to be opened up 25 years ago, at last looks set to become reality. The
Constitution (122nd) Amendment Bill finally got the nod of Rajya Sabha. Government
successfully stitching together a political consensus on the GST Bill, to pave the way for
much awaited roll out of the landmark tax reform that will create a common market of 1.25
billion people. GST will be a game changing reform for Indian economy by developing a
common Indian market and reducing the cascading effect of tax on the cost of goods and
services. It will impact the Tax Structure, Tax Incidence, Tax Computation, Tax Payment,
Compliance, Credit Utilization and Reporting leading to a complete overhaul of the current
indirect tax system. Law, provide for compensation100% to States for any loss of revenues
arising on account of GST, for a period which may extend to five years, based on the
recommendations of the GST Council Here, every tax payer will be issued a 15-digit
common identification number which will be called as Goods & Service Tax Identification
Number (GSTIN) a PAN based number. GST is a consumption-based tax levied on sale,
manufacturing and consumption of goods & services at a national level. 1 Many taxes have
been subsumed under GST.”

GST ON BISCUITS

We all know that there is a slowdown in the economy and like many other sectors we have
also been affected. “We are further affected by a high rate of GST. Biscuits below Rs 100 per
kg are being subjected to higher GST. Since the implementation of GST and since the time
that biscuits were put in 18% GST slab, we have been talking about it to the government.
Biscuits below Rs 100 per kg were actually exempted from excise in the earlier tax regime.
The principal of allocating a particular GST slab was of a revenue neutral rate and by that
logic it should not be subjected to 18% GST and clubbed with other premium biscuits which
are at Rs 200, Rs 300 and Rs 400 per kg. These are the biscuits consumed by the middle class
and the lower middle-class consumers and they are available at Rs 100 per kg and below.
Today, there is no processed food in India that is available at Rs 100 per kg and below. In
fact, adjacent categories like rusk which sell along with biscuit are consumed along with
biscuit or in place of biscuit, are all subject to 5% GST rate even though the MRP is much

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GST - A Revolutionary Change in India’gst & Sectoral Impact, V. Sai Nikhila1 K. Meghana, Volume 6,
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higher.2 Rusk is typically sold at Rs 150 per kg whereas biscuits of costing Rs 100 per kg and
below are subjected to 18% taxation. Many have been requesting government since
implementation of GST to look at the biscuit’s category. We were very hopeful and very
optimistic about the government reducing GST rate and we waited for more than one and a
half years, but that did not happen and we were forced to take a price hike. But these are very
price sensitive categories and as a result of price hike, there was a dip in demand which was
aggravated by the slowdown in economy in the price-sensitive category, it is not just Parle,
you would have heard it from other companies as well that consumers think twice before
buying a Rs 5 packet of either a glucose or Marie or milk or something like that. These are
typically categories which are sold at Rs 100 per kg and below. The slowdown has really
worsened when people are thinking twice before buying a Rs 5 biscuit packet and you have a
huge share of that market. What has been the response from the government? The
government is very positive about it. At no point, has the government said that it is not a
legitimate demand? So, in principle, they agree to it but they are taking time to probably
come up with a solution to it lowering or putting it in a lower GST bracket. We are still
optimistic.3 We did not take a price hike for almost one and a half years, then we were forced
to and as a result, the demand has gone down.”

BISCUIT INDUSTRY IN INDIA

India Biscuits Industry is the largest among all the food industries and has a turnover of
around INR 3000 crores. “India is known to be the second largest manufacturer of biscuits
after USA. It is classified under two sectors: organized and unorganized. Bread and biscuits
are the major part of the bakery industry and covers around 80 percent of the total bakery
products in India. Biscuits stand at a higher value and production level than bread. This
belongs to the unorganized sector of the bakery Industry and covers over 70% of the total
production. Indian Biscuit Industries came into limelight and started gaining a sound status in
the bakery industry, in the later part of 20th century when the urbanized society called for
ready-made food products at a tenable cost. Biscuits were assumed as sick-man's diet in
earlier days. Now, being most loved fast-food products for every age group, the biscuits are
easy to carry, tasty to eat, cholesterol free and reasonable at cost. States that have the larger
intake of biscuits are Maharashtra, West Bengal, Andhra Pradesh, Karnataka, and Uttar

2
https://www.livemint.com/industry/retail/ahead-of-gst-council-meet-biscuit-makers-hope-for-rate-cut-
1568552423952.html
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GST - A Revolutionary Change in India’gst & Sectoral Impact, V. Sai Nikhila1 K. Meghana, Volume 6,
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Pradesh. Maharashtra and West Bengal, hold the maximum amount of consumption of
biscuits. Even, the rural sector consumes around 55 percent of the biscuits in the bakery
products. The total production of bakery products has risen from 5.19 lakh tonnes in 1975 to
18.95 lakh tonnes in 1990. Biscuits contributes to over 33 percent of the total production of
bakery and above 79 percent of the biscuits are manufactured by the small-scale sector of
bakery industry comprising both factory and non-factory units. The production capacity of
wafer biscuits is 60 MT and the cost is INR 56, 78, 400 with a motive power of 25 kW.”
“Indian biscuit industry has occupied around 55-60 percent of the entire bakery production.
Few years back, large scale bakery manufacturers like cadbury, nestle, and brooke bond tried
to trade in the biscuit industry but couldn't hit the market because of the local companies that
produced only biscuits. The Federation of Biscuit Manufacturers of India (FBMI) has
confirmed a bright future of India Biscuits Industry. According to FBMI, a steady growth of
15 percent per annum in the next 10 years will be achieved by the biscuit industry of India.
Besides, the export of biscuits will also surpass the target and hit the global market
successfully. The consumption of snacks food such as biscuits, cookies, wafers and short
bread has very popular in India especially among children. The biscuits possess several
attractive features including wider consumption base, relatively long shelf life and good
eating quality. Long shelf-life of biscuits makes the possibility of large-scale production and
distribution. Good eating quality makes biscuits attractive for protein fortification and
nutritional improvements, particularly in children feeding programmes. Biscuits may be
regarded as a form of confectionery dried to very low moisture content. Bakery industry is
the one of the largest food industries in India with an annual turnover about INR 3000 billion.
The biscuit industry has been growing at an average rate of 15% during the past 3 years and
this is expected to be maintaining in coming years (IBMA, 2010). According to Fayemi
(1981), biscuits may be defined as a small thin crisp cake made from unleavened dough.
According to Okaka (1997), biscuit is a mixture of flour and water but may contain fat, sugar
and other ingredients mix together into dough which is rested for a period and then passed
between rollers to make a sheet. Biscuit may be classified either by the degree of enrichment
and processing or by the method adopted in shaping them. Based on enrichment criterion,
biscuit may be produced from hard dough, soft dough or from batters. Because of
competition in the market and increased demand for healthy, natural and functional products,
attempts are being made to improve the nutritive value of biscuit and functionality by
modifying their nutritive composition.4 The market for biscuits is very promising, and
4
www.thehindubusinessline.com/economy/gst-biscuit/
expecting a higher growth in near future. Asia pacific region is one of the fastest growing
markets. The biscuits market can be characterized as organized (Big Players) and
unorganized sector (Local Players) in each region. According to Biscuits Market-Global
Industry Analysis, Size, Share, Growth, Trends and Forecast 2012, the Biscuits market is
seen to be dominating in the food industry due to its innovative packaging, new flavours,
tastes, shapes, new technologies, and rising health consciousness among consumers. In rural
and urban population, urban population holds largest share in this market. 5 This research
review paper focused on the latest efforts taking to increase the nutritional status of blended
biscuits and major key ingredients required for preparation of blended biscuits.” “India is one
of the largest biscuit manufacturing countries after the US and China. While the country is
one of the largest biscuit consuming nation, per capita consumption is still very low at 2.1kg
– compared to Ireland, which is the highest at 21.76kg. The market for biscuits and cookies in
India has come a long way accounting for about 72 per cent of the sales in the bakery
industry. Increasing consumption of packaged and convenience foods, the availability of a
variety of biscuits and an increase in disposable incomes have provided a major boost to the
industry. There is a significant market of biscuit in India. The industry has flourished in India
immensely over the years and is still growing remarkably. The 12,000 crores biscuit industry
provides an enormous opportunity for growth in India. The biscuit industry has emerged in
later parts of the 20th century and now it has become the most loved snack enjoyed by every
age group. The variations in the biscuits like cholesterol free, healthy, tasty and easiness to
carry at a reasonable cost has attracted lots of people making the industry grow at a larger
pace.”6

Consumers even prefer higher value products and low-cost branded products over unbranded
items as their disposable income has become high. And keeping all this points in view, the
manufactures are providing the best products at lower costs.

The industry has several players, the top most being the Britannia and Parle which accounts
for 70% of the industry’s volume and revenues. “Other companies dealing in this sector
include Sara, Heinz, Excelsia (Nestle), SmithKline Consumer, United Biscuits, Brakeman’s,
Champion, Kwality and Priya.

5
www.thehindubusinessline.com/economy/gst-biscuit/
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The regulation of Biscuit industry in India is done by FBMI (Federation of biscuit
Manufacture of India) which is the apex body for the industry. IBMA (Indian Biscuits
Manufacturer Association) is also a body regulating and promoting biscuit industry in India.
Their main objective is to protect the interests and development with a systematic and
hygienic Biscuit manufacturing Industry in India.

Biscuits have a huge demand all over India with the maximum consumption in Maharashtra
and West Bengal. The biscuits even have a substantial amount of exports. After 2005, India is
the third largest producer of biscuits in the world. In the recent past, the growth in the
industry has been stagnant.”

The volume of biscuits has increased to 12-15% over the last few years, in last year it has
fallen to single digit which is not a good sign. “There are many factors which have slowed
down the rates. These include the price hikes due to inflation, late monsoon rains,
unacceptable expensive and exposure of new biscuits in rural market are the few reasons. The
rural grew faster than urban areas in last few years but the demands of rural population in the
last two year have slowed drastically. To sustain in the field with future growth prospects
many players are trying to innovate various options. Glaxo SmithKline is promoting
Horlicks. It is trying to make it stand for various breakfast products & biscuits. the other
companies like ITC tops in cream biscuits while Britannia tie up with Kotak results into
benefit from improvements in its manufacturing efficiency and distribution and better
profitability. Thus, companies are taking prominent steps to growth and become the industry
leaders. If monsoon rains do not pick up soon the rural spending would be much on the items
like biscuits and so the demand may still fall. And if the inflation grows not keeping up the
pace with the income of the marginal consumer, it will again slow down the demand. But if
the environment and the economic factors remain stable the biscuit industry will show
potential growth in the future years. The Indian market is still largely un-penetrated and so
there is a scope for growth. It will gear up aggressively in the future years. If biscuits were a
proxy for consumption in India, the trends would diverge, depending on who buys them. City
slickers are munching more cookies these days, although the rural folk have gone easy on
them, according to a report. The overall FMCG slowdown was largely led by rural markets
and smaller companies with annual sales of less than Rs 100 crore, Nielsen said in a recent
report.7 “While value categories or small packs are seeing a decline, there has been no issue
in consumer demand for premium sub-segments and bigger packs in biscuits, which are still
7
Ibid
growing. Biscuits are India’s largest consumer product segment, worth Rs 35,000 crore, and
grew 2.5% in the April-June quarter. Biscuits costing more than Rs 100 per kilo, the premium
version, account for twothirds of the market and grew 8%. The rest of the market — selling
for less than Rs 100 per kilo — fell 9%.”

“Mass products are usually first to get impacted. While premium or discretionary categories
are not entirely insulated, they are holding up so far,”

“But going forward, we need to keep a close eye on them,” said Chawla. “The urban-rural
divide holds true for consumption of most fast-moving consumer goods in India. Urban and
discretionary products are growing at a faster pace, while a few categories of mass-market
goods have been hurt. Daily home and personal products including creams, detergents,
toothpastes, deodorants and food items such as chocolates, malted beverages and noodles
grew at a higher rate during the April-June quarter.8

MARKET OF BISCUIT INDUSTRY IN INDIA

India Biscuits market is estimated to grow with a significant growth rate during the forecast
period. “Owing to a change in consumer taste & preferences, increasing health-conscious
consumers, and rising demand for convenience food. Biscuit industry is one of the largest
food industries in India, produces 5000 tons of biscuits every day. Rise in the innovation of
biscuits product offerings, increasing per capita household income, the surge in consumer
spending on food products will lead the market over the forecast period. Moreover, the
consumers are more conscious than ever before and the movement toward healthy eating
habits is one of the greatest influencers of the India biscuit industry. Bakery industry is one of
the oldest businesses in India, which is modernizing and is constantly changing in terms of
product range and services due to the high nutrient value. India is the second largest producer
of biscuits in the world after the USA. Increasing indulgence, health concerns, and familiarity
with luxurious taste, which has developed among Indian consumers, have led Indian
manufacturers to experiment with a variety of biscuits and cookies. This has also led to
higher growth in the premium segment compared to the economic and mid segments of the
industry. Cookies type is projected to be the fastest growing segment in the India biscuits
market. On the basis of product type, the India biscuits market has been segmented into
Cookies, Cream Biscuits, Glucose & Milk Biscuits, Marie biscuits, Salt Crackers Biscuits,

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and others. Cookies segment is estimated to be the fastest growing product type of India
biscuit market during the forecast period 2019-2025.”

“Consumers taste has been changing continuously with time. With increasing purchasing
power, consumers are readily paying for taste and quality products. In India, there are lots of
festivals people celebrate. Giving away sweets & chocolates were used to be a tradition
earlier, but due to fear of adulteration in sweets, consumers have shifted to buy premium
cookies in place of sweets. Gifting options pertaining to high-end cookies is a key trend
prevalent in metro cities owing to its longer shelf life as compared to chocolates and sweets.
Non-premium category biscuits are the leading segment in the India biscuits market. On the
basis of category, the India biscuits market has been segmented into premium biscuits and
non-premium biscuits. Non-premium biscuits dominate the market over the forecast period
2019-2025. Due to Large population base which majorly comprises rural population creates a
huge demand for an affordable biscuit. Premium biscuits are projected to exhibit the fastest
growth rate during the forecast period. Due to variation in premium biscuit products,
increasing awareness among consumers, widening of distribution channels coupled with high
visibility and accessibility of biscuits in retail outlets are further forecast to drive the market
in the coming years.” Retail stores Distribution channel is projected to dominate the India
biscuits market during the forecast period. On the basis of the distribution channel, the India
biscuits market has been segmented into Retail Stores, Specialty Retailers, and Online
Distributors. “The retail store’s channel is witnessing high growth. Retail stores have high
growth potential due to the presence of large middle-income group further new wave of
expansion through the compact store format will favor the biscuits demand in retail stores.
Convenience stores represent the largest segment followed by supermarkets and
hypermarkets owing to the rising number of health-conscious consumers, expanding the
working population and increasing urbanization are boosting the country’s biscuits market.
Apart from normal stores e-commerce is the next big sector in India. According to Market
Outlook report, India's biscuit market stood at $3.9 billion in 2016, and is projected to grow
at a compound annual growth rate (CAGR) of 11.27 per cent, in value terms, between 2017
and 2022, to reach $7.25 billion by 2022.The demand will be driven by factors like taste and
preference, demand of convenience food, concern for health and wellness as well as shift
towards premium biscuits such as sugar free, oats, wheat and multi-grain biscuits among
others.”9

9
Ibid
INDIAN BISCUIT MARKET: HISTORY AND CURRENT SCENARIO

In past, “biscuits in India were made by using ordinary flour, sugar and saturated oil and
underwent industrial procedures of molding, baking and cooling. However, with an increase
in the disposable income as well as changing tastes and preference of people forced the
biscuit manufacturing units to come up with a new range of biscuits. This challenge was met
well with the innovation of salted biscuits which reduced the amount of sugar put in the batter
by adding more salt. Other changes made in the production of biscuits were thinner crusts and
addition of digestive ingredients to make them more nutritious. Currently the biscuit industry
is made up of the organized and unorganized sector with renowned brands dominating the
market share in the organized sector. On the other hand, the unorganized sector consists of
small bakery units, cottage and household type manufacturing and packaging units that help
them distribute their goods in the surrounding areas. Self-managed and focused product lines
plus less expenditure on marketing are the factors that contribute to the growth of the
unorganized sector.” 10

Embracing innovation to overcome challenges

Demand for healthy biscuits is increasing due to the active lifestyle of consumers who are
looking for convenient eating options. “Currently, India has 64 percent of its population in
the working age group which makes millennials the driving force behind modern consumer
trends. Millennials carefully read nutritional values on packages as well as grab snacks at
least two times a day. This is why the biscuit industry must pay close attention to the recent
trends and opportunities which can help it produce exactly what is in demand. Biscuits are
broadly categorized in the following segments like Glucose, Marie, Cream, Crackers and
Milk but most consumers have already tasted these which is why companies are increasingly
innovating with new flavors and ingredients to fuel the interest of consumers. As per past
developments, biscuits have transitioned from light to high fiber to multi/whole grain and
oats as health-conscious consumers want biscuits with high nutritional value. This has made
manufacturers use more fibrous and nutritious ingredients like oats along with reducing the
number of artificial colours and preservatives and avoiding high fructose syrup completely.

10
https://www.indianretailer.com/article/sector-watch/food-and-grocery/the-transformation-of-indian-biscuits-
industry.a6539/
Another variant for health-conscious consumers are the low sugar or sugar-free biscuits that
help with weight management, cholesterol management and more. Such low sugar, and even
sugar-free biscuit options, however, do not compromise with taste as they contain healthy
replacements such as honey, coconut, fruits, dark chocolate, etc. Furthermore, brands are
going one step ahead by experimenting with delicious yet nourishing exotic fruits and nuts.
Hazelnuts, figs, pears, bananas and many such ingredients have been emerging in popular
biscuits across the country, elevating the biscuit eating experience for consumers. Since fruits
and nuts are packed with essential vitamins and minerals, these biscuits are perfect for new-
age consumers who want health with taste.”11

IMPACT OF GST ON BISCUITS INDUSTRY

With a broad demand slowdown dragging down the growth rate of most FMCG segments
over the previous quarter, “sales of cheaper biscuit brands have been hit particularly hard,
say, industry representatives. But, the premium category, while slowing, has not been
affected as badly. According to data shared by company executives, while the overall biscuit
category grew at nearly 10 per cent in the first quarter of last year, this rate slowed to 2 per
cent in the April-June period of the current fiscal year. But the impact has been felt primarily
in the sub - Rs 100 per kg category, which account for around 35 per cent of the market.”
“This segment has fallen sharply, declining by nearly 10 per cent in the first quarter. In
contrast, the above Rs 100 per kg category saw sales growth slow slightly to around 8-8.5 per
cent,” a senior industry sales executive said. “Analysts note that this slowdown has come at
an inopportune time for companies with large exposure to the sub- Rs 100 per kg category,
particularly for segment leader Parle-G, which had expressed fears of layoffs in the future.
But the demand slowdown, concentrated more in the rural regions, is just the latest
misfortune to have befallen the more affordable segment of biscuits, which has been on the
decline since the rollout of the Goods and Services Tax (GST). 12 The government had
brought up the level of taxes on the sub - Rs 100 per kg category on par with the above `100
products, with both taxed at 18 per cent currently. Mayank Shah, senior category head, Parle
Products, had said recently that the consumption of a basic Rs 5 packet has taken a hit due to
a high GST rate which has affected the overall run and that “low demand and high GST rate
will eventually lead to the production slowdown and maybe job cuts. Analysts agree that
brands with lesser exposure to the sub - Rs 100 category have been able to deal with the
11
https://www.nuffoodsspectrum.in/blog/31/6586/the-transformation-of-indian-biscuits-industry.html
12
https://www.business-standard.com/article/economy-policy/why-india-s-labourers-can-t-afford-to-buy-a-
packet-of-biscuits-for-rs-5-119082500210_1.html
slowdown better. For instance, market leader Britannia Industries, while dealing with a
slowdown in overall volume growth, has increased its market share. Though the value
biscuits segment declined, Britannia gained volume market share (~35%) focusing on
premium products, noted Shirish Pardeshi and Aasutosh Sai Charla of Centrum Broking. JM
Financial’s Richard Lu and Vicky Punjabi also note that this gives companies like Britannia
and ITC more opportunity to acquire larger shares of the market.”

“While Parle was the most impacted by GST transition, it has still chosen to not move from
its Rs 5 per pack price-point for its flagship Parle-G biscuits. With the slowdown, Parle is
likely finding it increasingly difficult to offset margin pressure through volumes,” they said,
adding, “such a situation, in fact, represents a good opportunity for premium players like
Britannia and also ITC to fortify their presence in the biscuits category”. Fast-moving
consumer goods or FMCG as we call it is the fastest and most powerful sector in the Indian
economy. It is the driving force behind the current consumption based Indian sales. In that
sector, a major shareholder is the Biscuit Industry. They have an approximately ₹ 35000
crore value and play the role of a protagonist in the consumption sector. Companies like
Britannia, ITC, and Parle control 69% of this market. So now, imagine, if this branch of the
FMCG sector drops its sales by just 1 percent points, that’s a ₹350 crore loss, in an instant.
The leaders of various top Biscuit companies are currently blaming the GST tax regime and
the advantage it is bestowing upon small and local biscuit manufacturers and sellers. Also,
how local sellers would prefer high margin non-branded products over branded ones when it
comes to selling at their shops and hence not allowing the big brands to target their rural/local
consumer base. Basically, they are what could be called a low-cost, high retail and high-profit
alternative to the products of big brands like Britannia and Parle. “Many players are not tax-
compliant and have a low operating cost which helps give high margins to retailers who push
brands mostly in rural areas”, said Mayank Shah, category head, Parle products. The Biscuit
Industry falls under the 18% slab of the GST regime. This not only increases the cost of the
product but also increases tax regime, compliance costs and in this case, difficulty in
competing with local sellers. Mayank Shah is one of the many who is looking for a tax cut to
help the industry.13

“Biscuits are a staple and the most basic packaged food products in the country. Rate should
be reduced to 12% so that it can be effectively passed through price-cuts, which in turn, will

13
https://www.thehindubusinessline.com/economy/industry-seeks-lower-gst-of-5-per-cent-on-biscuits-priced-at-
rs-100-per-kg-or-below/article29430050.ece
boost consumption and make it level playing field,” said Varun Berry, managing director at
Britannia Industries, the country’s largest biscuit maker.

The Biscuit Industry has been seeing a weak growth rate recently. Contrary to popular belief,
about the positive impacts of GST and easing tax burden, the industry grew by 12% last year
which is slower than the 14% in the year before. Moreover, the problem is not only in this
industry. Various local producers with unbranded and loose packaging have been eating away
at the sales of vast spread, high output and employment generating branded companies.
Sectors like Tea, detergents, soaps, and Biscuits seem to be the starting targets.

IMPACT OF GST ON FMCG SECTOR

Biscuit is one of the products that have led to a slowdown in the FMCG sector. The USD 45
Billion Fast Moving Consumer Goods (FMCG) industry in India is one of the major
contributor to the State exchequer in excess of USD 6 Billion from Direct and Indirect taxes.
FMCG sector traverses the entire rural and urban parts of the country. Therefore, the sector is
going to face a significant change once the GST law is enacted. In the ensuing paragraphs, we
have sought to identify the key issue arising from the Model GST Law as may be relevant for
the FMCG industry. “The Fast-Moving Consumer Goods (FMCG) sector is the key
contributor of the Indian economy. This fourth largest sector of Indian economy provides
employment to around 3 million people which accounts for approximately 5% of the total
factory employment in the country. These products are daily consumed by each and every
strata of the society irrespective of social class, income group, age group etc. FMCG sector is
more lucrative because of low penetration levels, well established distribution network, low
operating cost, lower per capita consumption, large consumer base and simple manufacturing
processes for most of products resulting in fairly low capital investments. The industry is
highly competitive due to presence of multinational companies, domestic companies and
unorganized sector. A major portion of the market is captured by unorganized players selling
unbranded and unpackaged products. More than 50 per cent of the total revenues of FMCG
companies come from products worth Rs 10 or less1. 14 This has made the proliferation of
localized brands which are offered in loose form in small towns and rural part where brand
awareness is low. In last 10 years domestic players are giving tough competition to
multinationals; in fact, they have outstripped many MNCs in growth and market cap.
Between 2005- 2014 the profit of domestic companies increased by 24% against 14%
increase of multinational companies. Urban India accounts for 66% of total FMCG
14
GST & its Probable Impact on the FMCG Industry in India, Dr. Mohan Kumar, CA Yogesh Kumar
consumption, while rural India accounts for the remaining 34%. However, rural India
accounts for more than 40% of the consumption in major FMCG categories such as personal
care, fabric care and hot beverages. As per the analysis by ASSOCHAM, companies like
Hindustan Unilever Ltd and Dabur India generate half of their sales from rural India while
Colgate Palmolive India and Marico constitute nearly 37% respectively.”15

Warehousing of Goods

The most perceptible impact of the GST would be on the warehousing policies of the
companies in FMCG sector. Presently, the companies are being forced to establish multiple
warehouses in each State and to transfer stocks to them. By doing that, they used to avoid
sales tax on inter-state sale as well as transportation cost due to the market propinquity.
Under the GST regime, imposition of tax would be indifferent irrespective of intra-state or
inter-state supply of goods & services with India striving to become the single largest market
globally. However, shifting from 'multiple warehousing' strategy to 'warehousing
rationalisation' strategy would result in reduced proximity to customers but saves the
compliance cost relating to administration of warehouses. Therefore, decision relating to re-
locations of warehouses need extra considerations.

Keeping in mind the operational efficiency of the supply chain, we understand that businesses
should not consolidate the warehouses until the enactment of GST Law unless there is any
clear visibility of high-cost burden on keeping multiple warehouses based on extensive cost-
benefit analysis.

Stock Transfers

FMCG companies set up various depots in each State for spanning into the large consumer
base. Under the present tax regime, inter-state stock transfers to such depots are not charged
to tax whereas GST would be payable on supply of goods without consideration which
includes inter-state stock transfers [Schedule I of GST Model Law read with Section 3].
Taxability of stock transfers would lead to blocking of liquid funds of the companies and
consequently the businesses would require an elevated working capital base.

Valuation

GST is going to act as an enabler to small-scale enterprises as the concept of MRP based
valuation has no place in the Model GST Law. Under the present tax regime most of the
15
Ibid
consumer goods attract excise duty based on MRP & VAT on actual consideration.
Consequently, to survive in the competition small businesses in this sector is forced to
maintain their selling price low & MRP high to give distributors more margin to earn so that
they are motivated to sell more of their products. In doing that, an enterprise ends up paying
high excise duty and lowering its profits. Under GST, there is no such burden on small
companies to pay tax on MRP. Section 15 of Model GST Law contains the valuation
provisions wherethe transaction value of a supply is the basis for computing the taxable
value. Therefore, under GST model a small enterprise would be paying lesser tax and
contemporaneously giving distributors extra margin to earn by keeping high MRP (usually
equal to or less than that of Big players in the sector). For example, ABC Private Limited is
selling goods to wholesaler at Rs. 100 (MRP inclusive of all taxes Rs. 200). Assuming no
input tax credit, total tax cost of manufacturer would be Rs. 27.5 {12.5% VAT on Selling
Price and 12.5% Excise on MRP (less abatement of 40%)}. However, under the GST regime
total tax cost would be Rs. 18 (say, 18% on transaction value i.e. Selling price).
Consequently, net profit of the small businesses will rise due to reduction of huge tax cost.16

Stock Transfer & Free Sample

The major problem comes in the valuation of inter-state stock transfers and free sample
valuation. In such cases, Model GST Law has prescribed valuation rules where the taxable
value shall be the transaction value in case of supply from one place of business to another
place of business [Rule 3]. However, it has not provided the manner in which such
transaction value is to be computed as the price paid or payable for such transfer is NIL.

Exemptions

The companies under FMCG industry have set up their fiscal units in the States of Himachal
Pradesh and Uttaranchal as there is a complete excise benefit on the manufacture. Also, in the
present VAT regime there are lower tax rates of 4-5% on the food items. On one hand, there
are those units with no excise duty &a lower VAT bracket of 4-5%moving to higher tax
bracket of 12-18% under GST and on the other hand, units paying excise duty, VAT and
entry tax together amount to 24-25 % moving to lower tax rates of 12-18%.

Therefore, the Government has to make a balance between the two scenarios in order to keep
the credit chain working under GST and providing relief to specified business
contemporaneously. Government may prefer separate rates on these goods.
16
GST & its Probable Impact on the FMCG Industry in India, Dr. Mohan Kumar, CA Yogesh Kumar
Positives

 Companies could generate substantial savings in logistics and distribution costs as the
need for multiple sales depots will be eliminated. For this, the company can now
focus only on reduction of supply chain network cost rather than taxation as the stock
transfers under GST will remain tax neutral.
 Prices of certain goods could see a sharp fall as the effective tax cost under GST
would be substantially lesser than what is in present regime.

Negatives

 Aerated beverages, tobacco and other so called "sin/demerit" goods may attract total
indirect tax of 40%, leaving these goods costlier by 10-15%.
 Companies enjoying exemptions on excise duty based on their location and food
companies, now, have to bear high tax incidence under GST.17

CONCLUSION

When snack makers start to lament that Indians can’t afford to spend 5 rupees (7 cents) on
biscuits, it’s time to stop arguing over how much of the nation’s slowdown is cyclical and
what part is structural. “Considering its glaring income, wealth and consumption inequalities,
India is a surprisingly calm society. However, when purchasing power dries up to the extent
that rural laborers and urban blue-collar workers have to think twice about cheap munchies,
then the situation is desperate. The culprit is deep-rooted wage suppression, a long-term issue
that needs attention. Britannia Industries Ltd., the No. 1 Indian biscuit maker, recently
sounded alarm bells over the sharp deceleration in its domestic sales volumes. Rival Parle
Products Pvt. chimed in and said jobs were at risk for as many as 10,000 of its workers. A
Parle executive blamed India’s 2017 goods and services tax, or GST. While the consumption
tax may indeed have been an additional burden in an economy slowing under a disastrous
November 2016 currency ban, the funk has its roots in insufficient wages. In recent years,
only about a third of the economy’s income has gone to labor, with providers of debt and
equity capital taking the rest, according to India Ratings and Research Pvt., a unit of Fitch
Ratings.”

17
Ibid