Impact of GST on FMCG Sector

The most visible impact of GST would be on the warehousing strategy of FMCG companies.

The 3 lakh crore Fast Moving Consumer Goods (FMCG) industry in India is one of the major contributor to the state exchequer in excess of Rs 40,000 Crores.

GST is the biggest tax reform in the history of the country. The Government is continuously ensuring a favourable business climate in India and one of their initiatives is the GST, which promises to integrate India’s multi-layered indirect tax system into a single unified one, unshackling India from its bureaucratic web and improving the ease of doing business on a large scale in India. The changes proposed in this unified taxation system will reduce transportation cycle times, enhance supply chain decisions, lead to consolidation of warehouses which will invariably help the logistics and warehousing industry reach to a great height.

As we would know Warehouses and logistics are the integral part of the organisations strategic business plan and operations. While the warehousing sector is assumed to be one of the primary bottlenecks in driving the economic growth, it can act as a catalyst to realise India’s manufacturing dream over the next decade. A multiple warehousing strategy works well for interstate organisations in India generally operate warehouses in multiple states i.e. one warehouse in each state. The organisation then declares a transfer of goods as a stock transfer to negate the CST incidence on interstate sales as a transfer to one’s own warehouse. To eliminate the entire chaos of stock transfers GST can act like a boon to the warehousing industry, India will become a common market without any differentiation between the interstate and intrastate sales thus ensuring a cumulative tax incidence with both the transactions being taxed equally.

Major categories being food & beverage followed by household and personal care. Distribution costs account from 2 to 7% of turnover for FMCG companies. Currently FMCG companies establish warehouses in each state (with the tax consideration to avoid CST on interstate sales) and do stock transfers to them. Subsequently goods are sold to distributors locally. The decision on warehouse is based on tax consideration rather than market proximity or transport considerations. Under GST as local and interstate supply would be tax neutral with India emerging as single largest common market, location of warehouses needs to be reconsidered. Savings to the tune of 1.5% of sales is expected as a result of warehouse rejig. A level playing field would be created in favor of small startups in the business of delivery of organic products.

At present many manufacturers have set up their units in areas having tax holidays or incentives (Himachal, Uttaranchal etc.) which may not be available post GST. FMCG manufacturers using imported raw materials will have to rethink the strategy as imports would attract IGST and make them less attractive vis-à-vis local products, although full credit is available.

Once the GST kicks in that the time warehouses will gain market as manufacturer will be more interested in directly selling from the warehouses rather than transferring to various outlets.

The hi-end Value Added Services (VAS) such as world class track and trace, picking and packing will witness an upswing. Increased demand/supply is also likely due to increased customer expectations and better organized supply chains.

Efficient handling of larger volumes per warehouse (owing to new/ consolidated warehousing) would command increased reliance on automation/ technology applications such as Put-to-Light, Pick-to-Light, Enterprise Resource Planning (ERP) and Warehouse Management System (WMS). Skill set upgradation with increasing share of organized logistics setups, the need for technically qualified and optimally skilled workforce across the supply chain is likely to become more glaring. Hence, to cater to this increasingly indispensable need, supply of skilled workforce may improve.

Hence, GST will be pivotal in rationalizing the indirect tax procedures. But its impact will only be understood after the announcement of the final draft of the GST law. The industry is still with the hope that the positive impacts of GST will overcome the disadvantages of the warehousing industry.