For the fast moving consumer goods (FMCG) sector, the Union Budget 2012-13, presented by Finance Minister Pranab Mukherjee to Parliament on Friday, has two significant dampeners — two per cent raise in both excise duty and service tax. Most fast moving consumer goods (FMCG), consumer electronics and durable products fall under the 10 per cent excise bracket. So, an increase of that rate, has a direct impact on the end-prices. The same is the case with service tax, too. A two per cent increase will mean a consequent pass-on to consumers.
Clearly, both manufacturers and service providers, including retailers, are unhappy with the announcement. “I find this Budget inflationary,” says A Mahendran, managing director, Godrej Consumer Products Ltd (GCPL). “I don’t understand what was the need to do it when managing inflation has been such a challenge for the government and the central bank. Just when inflation was hovering in single-digits, here comes the hike in excise and service tax.”
Naresh Bhansali, chief executive officer, Emami Ltd, says, “Increase in excise duty and service tax to 12 per cent from 10 per cent will severely impact the manufacturing sector, increase costs and will be inflationary for consumers. This is not be helpful in any way.”
But indirect tax experts say the move to hike excise and service tax is on expected lines. “Last year. the standard rate of excise was maintained at 10 per cent. It had to go up given that the government needed money,” says Pinakiranjan Mishra, partner & national leader, retail & consumer products, Ernst & Young.
Despite this, some companies, especially, in the consumer durables space, had reason to cheer thanks to customs duty exemption on LCD and LED panels as well as parts of memory cards that are used in mobile phone handsets. This comes as a big relief for TV and mobile phone makers, who depend on imports of these products. The finance minister also announced a reduction in customs duty on specified raw materials that go into the making of adult diapers. This again is being viewed as a relief to the industry and help boost consumption. Last year, excise duty was slashed on sanitary napkins as well as diapers for babies, adults and clinical use, from 10 per cent to one per cent. This had happened after much lobbying by the industry.
Also, on the list of beneficiaries of lower customs duty are energy-efficient lamp makers, soya and pro-biotic product makers, iodised salt makers as well as match-stick makers.
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Cigarette makers however, have been on the receiving end again. While customs duty was reduced on 65 mm cigarettes, companies had to grapple with additional ad valorem duty of 10 per cent on existing rates. This has been done on cigarettes of over 65 mm length. “This ad valorem duty would be chargeable on 50 per cent of the retail sale price declared on the pack,” Finance Minister Pranab Mukherjee said on Friday. While ITC was not immediately available for comment, industry experts say the move will result in price hikes in future.
Other “demerit” goods such as bidis, pan masala, gutkha, chewing tobacco, unmanufactured tobacco and zarda scented tobacco in pouches were not spared either — an increase in excise duty has been proposed on all these products.