GST Impact across FMCG & E-Commerce Sectors

India: GST (Goods & Services Tax) will bring a uniform tax regime across various sectors and will convert Indian market into one common market providing greater ease of doing business and higher savings of transportation costs. Some companies are anticipated to gain more due to reduced standard tax rate (approximately proposed to be 18%) as compared to effective tax rate of >26% (12.5% excise and VAT at 12-14.5% on top of excise). On the other hand, many agricultural processed products enjoying VAT exemption or lower tax (4-5%) if included under GST portfolio, then it will result into higher tax incidence.

In FMCG sector, substantial savings can be generated by companies in logistics and distribution costs as GST will eliminate the need for multiple sales depots. Effective distribution cost for FMCG companies accounts to approximately 2 to 7% of their turnover. Currently FMCG companies pay approximately 24-25% tax inclusive of excise duty, VAT and entry tax. However, GST at 17-19% will yield in significant reduction in taxes. As any supply (say sale or stock transfer) would be treated taxable under GST, it may lead to increased requirement of working capital and cash flow to be effected till return claims gets settled. For manufacturers, who have established their units in areas having tax holidays or incentives (like Himachal, Uttaranchal, etc.), might not enjoy the same benefit post GST. FMCG distributors and retailers will be benefited as they will be able to set-off input credit rom services (say transport, rent, etc.) against their GST liability, which is currently not possible. The key beneficiaries of GST are Hindustan Unilever, Colgate, GSK, Asian Paints. Petroleum, Liquor and Tobacco products are excluded from GST.

For E-Commerce, GST will help in creating a single unified market across India and goods and services can be transported freely to every part of the country eliminating the cascading effect of taxes on customers bringing efficiency in product costs. E-Commerce companies will have to examine or set up rules to identify inter-state & intra-state services as there is an additional compliance requirement for e-commerce companies. For instance, in case if it is stated that e-commerce companies have to pay applicable CGST + SGST in the state where the service receiver is located, then the e-commerce companies will have to take registration in all those states where its service recipient (i.e. vendors) are located. Even the tax collection at source (TDS) guidelines in GST will increase documentation workload, administration for e-commerce firms and push up costs.

According to TechSci Research, the engine of GST running, would help India to emerge as a single largest common market as inter and intra-state supply will be tax neutral. Warehousing strategy will be highly impacted as a result of GST and location of warehouses will be a major task and should be reconsidered by both FMCG and E-commerce companies. Reduction of overall tax rates and warehouse rationalization, is expected to generate saving, cumulatively ranging between 200-300 bps. Also, GST will create a level playing field, in favor of small startups in the business of delivery of organic products. FMCG manufacturers will have to rethink the strategy of using imported raw materials as imports will levy IGST, making them less attractive in comparison to local products, although there is availability of full credit. For E-commerce, in case of B2C transactions, place of supply would be location of service provider.

According to a recently published report by TechSci Research, “India E-commerce Market Forecast & Opportunities, 2020”, the country’s e-commerce market is projected to grow at a CAGR of more than 36% during 2015-2020. E-services segment, which comprises online travel, online payments, online classifieds, etc., is expected to continue its domination through 2020. However, the e-tail segment that includes electronics, apparels & accessories, health and personal care, etc., is expected to witness significantly higher market growth compared to e-services segment over the next five years. During 2015-20, the western region is expected to remain the largest e-commerce market in the country. Major players operating in India’s e-tail market include Flipkart, Snapdeal and Amazon.