FMCG firms start putting infra in place for GST

As the goods and services tax (GST) enters the final lap before taking effect, consumer goods companies are working round-the-clock to meet the July 1 deadline. Whispers of a possible extension in the deadline were quashed on Sunday by the Prime Minister, urging states to clear their respective State GST Bills without delay. The Central, Integrated, Union Territory and GST Compensation to States Bills were cleared earlier this month by Parliament. 

“There is a realisation that GST will be a reality soon and that readiness in this regard cannot be postponed,” says Nihal Kothari, executive director, Khaitan & Co. “All companies are pushing the pedal on implementation. But, while 70 per cent of the large consumer goods companies can meet the July 1 deadline, SMEs (small and medium enterprises) are not in a position to do so. Many of them have begun work only now, appointing consultants, doing impact analysis and understanding the documentation required.”

The country’s biggest tax reform since Independence will harmonise a maze of central and state levies into a national sales tax, creating a single Customs union that is aimed to ease the cost of doing business and improve growth of gross domestic product. Gains for consumer goods entities will come in areas such as warehousing, logistics and the supply chain, expected to get rationalised as the need for godowns in every state will be eliminated. 

“We are evaluating our distribution centres across the country and figuring out where we can set up hubs,” said Suresh Narayanan, chairman, Nestlé India. “While investments will be required to build such hubs, in the long run, returns and cost efficiencies will be higher.”

“We will have mother depots in a minimum of three to four states, which will eliminate the smaller warehouses that exist in every state today. This will improve the economies of scale and reduce costs spread across a vast network of warehouses,” said R Sridhar, vice-president, taxation, Coca-Cola India. 

The other gain is seamless transfer of credits from production to consumption, to ensure the onus of paying is distributed equally among stakeholders. The challenge here, say experts, is to ensure every stakeholder, including suppliers, distributors and retail trade, is part of the network. 

Bharat Puri, managing director, Pidilite Industries, also head of business chamber CII’s national committee on fast-moving consumer goods (FMCG), says most companies are talking to their retail traders, even as larger suppliers and distributors become GST-compliant. “Most companies directly reach retailers in general trade, as part of their direct distribution effort. This gives them a chance to educate retail trade of the need to migrate to GST. Many companies are also undertaking training sessions for retail trade directly or working with large distribution partners to increase awareness among small retailers of the importance of shifting quickly,” he says.  There are teething issues and most experts say it will take at least two to three months after implementation for most companies to get used to the new system. Retail trade, they say, could take longer to adjust. “The bigger fear right now is of trade destocking, likely to happen in June before GST kicks in,” Kothari says. Possible due to the worry within trade that they’d be paying the full price for goods procured but not getting the credit due to them. Company sales could suffer in the short term due to this, he says. The other issue is of stock transfers within an entity. Kothari explains that goods manufactured in excise-free zones, a practice common with consumer goods companies, could suffer. 

“Products that do not enjoy area-based exemptions will get full credit. The problem will emerge in the case of goods made in excise-free zones. They will not get full credit, implying they will have to be valued at market price.”

Status check

• Companies are working round-the-clock to meet the July 1 deadline

• Seventy per cent of the large consumer goods companies can meet the deadline, say experts

• SMEs are not in a position to do so. Many of them have begun work only now, appointing consultants

• Gains for consumer goods entities will come in areas such as warehousing, logistics and the supply chain