What Is The Impact Of Gst On Fmcg Sector?

By Author: Mohit Yadev
Total Articles: 74
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Goods and Services Tax bill has reached its final stage of implementation and has already been passed by the Lok Sabha. The government has received industry specific requests to address some of the issues as they are finding it difficult to deal with the changes proposed under the new indirect tax regime. Some trade bodies are also lobbying for a further delay in GST rollout as Small and Medium Businesses (SMBs) are yet to adopt the changes required for a smooth transition.
While this transition will not pose a big challenge for manufacturers, as they are already tightly regulated by the excise law, wholesalers and retailers in the country may face some heat.
Wholesalers and Retailers Outside Tax Bracket
Under the current indirect tax regime, wholesalers and retailers usually escape the tax liability as there is no mechanism by which their actual purchase and sale can be traced. Most of their transactions are done in black, meaning no invoice is issued to the buyer, and eventually no entry is posted in the books for such sales. 
These taxpayers usually leverage the tax liability evaded and undercut the ...
... market to gain in volume. Their margin of profit remains as low as 1 percent. Since under the GST regime, every invoice pertaining to taxable supply has to be uploaded on GSTN’s common portal and has to be accepted by the buyer, wholesalers and retailers will now be unable to escape their tax liability. The only possibility for tax evasion would arise if the entire supply chain is outside the tax network and did not file a return under GST law, which is very unlikely.
Impact During Demonetization
During demonetization, wholesalers and retailers had gone into a panic mode. Many wholesalers, distributors, and retailers had to de-stock the inventory and reduce the volume of goods.This destocking was triggered largely due to a steep fall in demand from the consumers. Sales of some of the FMCG companies in Q3 FY17 dropped more than 44% as compared to Q3 FY16, According to the data from Care Ratings report dated March 15, 2017.
Impact of Demonetization on Consumer Goods
Many of these FMCG companies had lamented that while the fall in consumer demand was limited, sales were severely impacted due to limited stock availability at retailer’s end.
Pre-Implementation Impact
We may witness a similar destocking activity during the transition phase. This will mainly be for easy availment of input tax credit. Wholesalers and retailers currently registered under state VAT law would have paid VAT on all the stock held at the sunset date of the current tax regime. Though provisions have been incorporated in the GST Bill wherein VAT paid under current regime will be allowed as input credit under the GST regime, however, the government has imposed certain conditionsfor availing this credit and thus wholesalers and retailers may lose some part of this credit under the new regime.
To avoid such scenarios, wholesalers and retailers are expected to de-stock the inventory during the transition phase and eventually re-stock under the new GST regime.
Post-Implementation Impact
Post GST implementation, these wholesalers and retailers will not be able to evade tax as the complete value chain will be tracked online. This may also result in a change in the modus operandi of the businesses working on thin margins. Also, we may observe a steep rise in demand for goods as a result of re-stocking by wholesalers and retailers.
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