Anubhav Sahu & Krishna KarwaMoneycontrol Research
The consumption sector is probably the worst hit in the run-up to the Goods and Services Tax (GST). Inventory reduction has had an apparent snowballing effect throughout the supply chain. While FMCG companies tried to push inventory in the month of June through various incentives, the distribution chain is grappling with weak GST preparation, lack of awareness and the fear of having to bear the brunt of adverse tax disparity after July 1. The consumer durables sector is similarly facing uncertainty on the inventory management side.
Our channel checks with the stakeholders (distributors, stockists, retailers and manufacturers) in the FMCG supply chain across metros, Tier 1 and Tier 2 cities suggests significant channel correction.
In the last quarterly result, Hindustan Unilever (HUL) had highlighted the likelihood of channel inventory correction, which seems visible now. Our conversation with a key HUL agency in eastern Uttar Pradesh suggests a sharp cut in inventory due to reduced offtake from the downstream supply chain. Wholesalers, stockists and kirana stores have reduced bulk purchases substantially and the stock available for sale has reduced from 15 days to about 7 days at the agency/ distributor level. This is expected to reduce further in coming days.
Not surprisingly, there has been a curtailment in the stocks supply as well from the companies. Business transactions are down by over 50 percent. In this context, the last 15 days of June (particularly after monthly account closing) might turn critical as the entire supply chain turns to “Just in Time” inventory management.
Our channel checks suggest that some companies have been pushing for sales in the month of June with higher commissions at the distributors’ level. Some FMCG companies have also offered to refund to distributors and dealers for any tax disparity fall out for the existing stocks. In select cases, companies have reached out to facilitate GST preparedness in terms of compliance.
However, the same supply chain bonhomie is not visible as we go down the supply chain at the retailers’ end. Retailers and wholesalers are relatively less prepared. Initiatives for GSTN registration are missing partly due to the expectations that GST rollout would be delayed. Further, there is apparently no incentive from the dealers to retailers for sharing of tax disparity burden for the stock, post GST.
At the retailer’s level, there is a visible lack of understanding regarding GST. It is only in the last few days that suppliers have issued directives to retailers to obtain GST registration numbers for an uninterrupted supply of goods after July 1. Retailers are clueless beyond that. Further, at this last post of the supply chain, there are concerns about higher tax payouts coming not from changes in tax rate but from the fear that all goods sold have to be disclosed for tax filing as everything gets mapped in the GSTN system.
In case of white goods, apparently, manufacturers do not seem to be offering any incentives to dealers to clear stocks procured by the latter prior to July 1, 2017.
Since dealers will be allowed to claim only 60 percent of the input excise credit on the pre-GST goods (subject to excise challan availability), they will be forced to pass on the un-adjustable input tax (on the excise portion) to the final consumer. This might result in a price rise. Alternatively, dealers may choose to take a hit on their margins by absorbing a fraction of the un-claimable excise duty in a bid to stay competitive and boost sales.
While the VAT paid on goods lying with the dealer after June 30 will be claimable, it’s not before a substantial increase in documentation, and consequently, working capital requirements.
In a bid to address these concerns, dealers, besides offering a 5-10 percent discount to get rid of unsold inventory, are not keen on placing new orders with manufacturers until June-end. Most of the increase in the tax rate from 20.5 percent (made up of excise of 8 percent and VAT of 12.5 percent) in the pre-GST phase to 28 percent in the post-GST era will be absorbed by manufacturers and dealers, with some percentage of the price increase to be passed on to the end-consumer as well.
Similarly, in the tier 2 cities and towns, showrooms and retailers are left to themselves to figure out an easy transition. In this context some have resorted to an early season of discount offers so as to reduce available inventory. New orders, in many cases, are scheduled for first week of July.
Overall, we expect the disruption on account of GST implementation to affect the consumption sector as a whole at least for a couple of quarters. Speed of realignment of supply chain and the coverage of downstream supply chain in the GST framework are critical.
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