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Brokerages see neutral to positive impact of GST on FMCG companies

The GST will be positive for Colgate and Dabur and will have neutral to negative for cigarette manufacturers

May 22, 2017 / 04:21 PM IST
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The Goods and Services tax or GST Council finalised the rate structure for most goods and services along with the GST compensation cess for various products.

In the GST rate schedule nearly 81 percent of items are in the 18 percent tax bracket or below and the remaining 19 percent at the highest 28 percent tax slab.

According to brokerage houses, broadly, the tax rate is neutral to positive for most FMCG sectors.

A report from Nirmal Bang-Institutional Equities states the current incidence of indirect tax on most FMCG items is in the range of 20-24 percent and, therefore, the proposal to tax some of the commonly used products such as soaps, hairoil and toothpaste at 18 percent is positive.

The tax proposals, to some extent, were consensus and, therefore, there is no major positive surprise for the Street.


Also, many companies enjoy excise duty exemption and those details are still sketchy as to what exemptions will be available under GST.

The GST will be positive for Colgate Palmolive and Dabur India and will be neutral to negative for cigarette manufacturers and other FMCG companies for an additional 5 percent cess on cigarettes and increase in incidence of indirect tax from 18-24 percent to 28 percent for other personal products-- ITC , Hindustan Unilever , Godrej Consumer, Marico, Emami, Gillette.

A research report from JPMorgan states that GST will have a positive impact on soaps, toothpaste, hair oil, adhesives, coal, large cars, SUVs while cigarettes, cement, white goods, formulations, small cars, two-wheelers, and tractors the impact will be neutral.

The items that will have to bear the brunt of higher GST rate are paints, skin creams, shampoos, laundry, switches, and three-wheelers.

Among FMCG companies, Colgate India is a beneficiary with lower tax for toothpaste, while the paints segment has seen a marginal tax increase.

Cigarette cess has been broadly in line with excise duty. A small ad valorem component has been included. Cigarettes will attract a GST rate of 28 percent plus cess. The cess has been finalized now at 5 percent plus specific rate.

The cess is broadly similar to the current excise structure, though we note an ad valorem component will imply tax rises with prices.

GST rate for skin creams, shampoos and laundry is higher at 28 percent. Packaged juices, noodles and chocolates have GST rates of 12 percent, 18 percent and 28 percent, respectively. The GST rate on biscuits is yet to be firmed up.

Most companies have stated that they will pass on the net benefits/adverse impact from taxes to consumers.

A research report from Motilal Oswal Financial Services, stated that the impact on margins will hinge upon pricing strategies being adopted by the companies in coming weeks post GST implementation.

With the implementation of GST, many companies in the FMCG sector will likely gain as a result of the potential shift from the unorganised segment to the organised segment.
Himadri Buch

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