FAST-MOVING CONSUMER GOODS (FMCG) are goods that sell quickly and for a low price. Consumer packaged goods is another name for these goods. This is one of the industries that makes a significant contribution to our economy. India is one of the largest producers of FMCG products. The FMCG industry is divided into three categories.

In India, there are three main segments in the FMCG sector:

• Household and Personal Care – 50%
• Healthcare – 31%
• Food and Beverages (F&B) – 19%
  

Processed foods: Cheese products, cereals, and boxed pasta.

Prepared meals: Ready-to-eat meals.

Baked goods: Cookies, croissants, and bagels

Fresh, frozen foods, and dry goods: Fruits, vegetables, frozen peas and carrots, and raisins and nuts.

Beverages: Bottled vitamin water, energy drinks, and juices.

Medicines: Aspirin, pain relievers, and other medication that can be purchased

without a prescription.

Cleaning products: Baking soda, oven cleaner, and window and glass cleaner.

Cosmetics and toiletries: Hair care products, toothpaste, and soap.

Office supplies: Pens, pencils, and market

FMCG AND E-COMMERCE

Increased reliance on online purchasing, as well as improved infrastructure and living standards, has provided FMCGs with new distribution channels and prospects.

Shoppers all over the world are increasingly buying products they need online because it provides advantages that traditional retailers cannot, such as doorstep delivery, a large selection, and reasonable costs.

The online market for grocery and other consumable products is expanding as companies rethink delivery logistics efficiency to reduce delivery times.

While non-consumables may continue to outnumber consumables in terms of volume, improvements in transportation efficiency have expanded the usage of e- commerce channels for FMCG acquisition.

INFLUENCE ON PRICES

FMCG goods are sold to the end consumer based on Maximum Retail Price (“MRP”), which is inclusive of all taxes, including the GST.

Any reduction in rate of tax on any supply of goods or services, or the advantage of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices, according to Section 171 of the CGST Act, 2017 which provides for anti- profiteering measure.

Impact of GST on FMCG

Since FMCG products typically include repeat and daily usage items, taxes on the same have repercussions not only for industry participants but also the massive consumer base.

Under the pre-GST regime, this industry has faced multiplicity of taxes such as excise duty, entry tax as well as different state VATs & in addition, CST on interstate transactions. There was cascading effect of taxes. Further, the set-off of excise and service tax was not available against VAT and CST which added to the cost

GST has resulted in reduction in costs, as GST paid across the supply chain (including manufacturing stage) on inputs as well as on input services is available for setoff against GST on supply of goods.

The companies began revising their rates and prices in response to the GST implementation, which benefited the factory by reducing costs, the distributors by reducing transportation costs, and, of course, the consumers by obtaining products at a lower price because the companies began to revise their prices.

Few popular exemptions in the FMCG sector:

Notification 2/2017 – CT(R) dt. 28.06.2017, as amended, prescribes the goods which are wholly exempt from payment of tax. Products belonging to FMCG: –

• Vegetables, whether fresh or chilled; fresh fruits; nuts such as almonds, pistachios, whether shelled or peeled;
• Milk, curd, butter milk;
• Contraceptives;
• Fabrics such as raw silk, uncombed wool, khadi yarn, etc.

The biggest challenge since the GST implementation for the FMCG and retail sector has been the effective rate of tax. While GST was expected to simplify taxation and bring uniformity, the different tax rate slabs and higher rates for consumer durables led to an increase in the cost of some items of mass consumption.

Given the same, the GST council has been working on rationalization of rates. In a recent GST council meeting6 broad rate reductions were introduced with a specific focus on products such as sanitary napkins, domestic electrical appliances/ white goods (food grinders, mixers, shavers, hair dryers etc.). Businesses continuously need to analyze the impact of the rate rationalization, especially from an anti-profiteering perspective.

FMCG industry is exposed to multiple tax rates (5%/ 12% / 18%) which has complicated the taxation system.

Unwarranted classification disputes due to classification based on specification and composition of the product. Aerated drinks (28% + cess) fruit-juice based drinks (12%), served in a restaurant 5% with no ITC; Industrial usage water (18%) v drinking water other than one sold in sealed container (Nil).

The Government has indicated that it will continue to work on rationalization of rates and try to move towards a simplified tax rate structure including merger of slabs.

The classification of certain cosmetics such as skin care preparations which also have medicinal properties and contain recognized medical ingredients has been historically subject to litigation since medicaments or ayurvedic items are taxed at a lower rate, whereas cosmetics are typically taxed at a higher rate.

The test for determining whether a preparation can be classified as a medicament or not depends upon whether it is meant primarily for use in treatment of skin disorders or diseases and whether the ingredients therein have known or recognized therapeutic value or not.

While there is an advance ruling on this issue that discusses some of the jurisprudence under the previous regime, and sets out some principles on how preparations can be classified as medicaments, a clarification in this regard with more concrete parameters could go a long way in ensuring consistent treatment and minimal disputes. However, there is difficulty in providing absolute guidance as the products are themselves unique in nature.

Composite vs Mixed Supply

> Supply of two or more goods may be naturally bundled (composite supply) or may not be naturally bundled but supplied for single consideration (mixed supply).

> The character of the supply involving bundle of goods, whether composite or mixed supply, is important for ascertaining the rate of tax applicable on such supply. Sec. 8 defines how such supplies are to be taxed.

> Combo of Toothpaste with Toothbrush; Shampoo with Soap, etc. What tax rate should be applicable on the single consideration charged?

> Goods are normally not naturally bundled as they are capable of being sold independently. A common example of composite supply can be – supply of charger along with electric shaver/trimmer.

> Artificial bundling of goods in FMCG sector is very common. During the festive season, several packaged foods and beverages are artificially bundled together and sold as a package for single price as gift items. If the invoice does not mention the consideration for each product separately, the concept of mixed supply shall become applicable, and the single price shall be taxed at the highest rate.

> Usually, the stores specify the price separately for each item on the invoice and apply tax rate individually.

2(74) “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply;

Illustration: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.

Section 15 provides for the Value of Supply leviable to tax under the charging section. Value of supply is the transaction value, which is the price actually paid or payable for the supply of goods where the supplier and the recipient are not related, and the price is the sole consideration. . Otherwise, value of supply is to be determined as per the Valuation Rules.

Section 15(3): The value of the supply shall not include any discount which is given–

(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if–

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.

No specific provisions for FMCG Sector.

Section 11 of the IGST Act prescribes the Place of Supply of Goods imported into, or exported from India.

POS of goods imported into India shall be the location of the importer.

POS of goods exported from India shall be the location outside India.

Sec. 2(5) “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;

Export of goods, or Supply of goods to SEZ for authorised operations qualifies as  Zero-rated  supply under GST u/s 16(1) of the IGST Act.

No specific provisions for FMCG Sector.

Section 10 of the IGST Act prescribes the Place of Supply of Goods other than in the course of Import or Export

Broadly speaking, where two parties are involved, Place of Supply is the location where movement of goods terminates for delivery to the recipient. [Sec. 10(1)(a)]

Where three parties are involved (bill to ship to), Place of Supply of the first sale is the location of the person on whose direction the goods are delivered to the third person. [Sec. 10(1)(b)]

Over the Counter [OTC] sales of FMCG products to consumers is treatable as an intra-state supply, liable to CGST + SGST.

Time of Supply – As applicable to Goods

No specific provisions for FMCG Sector.

Section 12 provides that the time of supply of goods shall be the earlier of the following dates, namely:-

The date of issue of invoice or the last date on which he is required u/s 31 to issue the invoice with respect to supply; or

The date on which supplier receives the payment with respect to the supply

Notification 66/2017 – CT dt. 15.11.2017 has prescribed that all taxable persons are required to pay GST on outward supply of Goods at the time of issue of invoice or the last date on which they are required to issue the Invoice. Tax is not payable on advance.

Input Tax Credit

Section 16(1): Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

Like any industry, suppliers in the FMCG industry are entitled for ITC of goods or services used by them in the course or furtherance of their business. Other provisions of Section 16 (conditions), 17 (proportionate availment; blocked credits) and 18 (special circumstances) are equally applicable.

Blocked Credit – 17(5)(h)

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(h) goods lost, stolen, destroyed, written off or disposed of by way of

gift or free samples; and

Marketing/ discount schemes

While all business has to offer different types of marketing schemes and offers, in the FMCG and retail the industry is structured in a way that the manufacturers/ importers offer a variety of pre- and post-sale discounts nd incentives, free samples etc. to dealers/ distributors. While the industry players, during implementation of

♦ GST have taken positions relating to different types of marketing schemes, a conclusive clarification on the same is still not available. Further, in some States, officers at the ground level have also commenced raising ueries relating to the practices adopted. Key issues pertaining to the same are as follows:  Tax treatment of different types of schemes –

♦ There are diverse range of schemes offered by FMCG and retail players to its distribution network, and due to the ecosystem, these keep evolving. Various categories of such transactions are as follows: –

♦ Post-sale discounts such as price discount, purchase based schemes, category growth, trade discount, turnover target discounts – Special discounts such as festival price discount, liquidation support and other seasonal rebates Merchandiser support, visibility allowance and security deposits received from exclusive outlets Corporate or bulk buy discounts Other allowances such as loading/ unloading allowance, freight allowance and event support the aforesaid schemes can either be cash discount or it could also be additional quantity supply.

♦ It also requires factual examination whether the secondary market schemes qualify as post sale discounts eligible for deduction under section 15(3)(b) or be considered as a ‘subsidy directly linked to price’ under Section 15(2)(e) of the CGST Act. If it qualifies as ‘subsidy directly linked to price’, it would attract GST in the hands of recipient. It is essential to ascertain the tax treatment, ITC impact of different types of schemes, as well as maintain appropriate documentation so that the entire value chain adopts appropriate tax practices.

Volume discounts: Buy more save more offers

Illustration: ‘Get additional discount of 10% if you purchase 10000 pieces of Apple Juice in a year, get additional discount of 20% if you purchase 15000 pieces in a year’

Such discounts are established in terms of an agreement entered into at or before the time of supply. In commercial parlance, such discounts are referred to as “volume discounts”.

Such discounts shall be excluded to determine the value of supply provided they satisfy the parameters laid down in Sec. 15(3), including the reversal of ITC by the recipient of the supply as is attributable to the discount based on credit note issued by the supplier.

Promotional schemes, off take discounts – Company issues promotional schemes and provides off take discounts to stockiest/ retailer wherein on buying some specified quantity of a product, the distributors will get additional quantity of that product free of cost (e.g.. buy 10 items with additional 2 items free).

Further, the chargeable as well as free supplies are mentioned on the face of the same invoice (e.g. it is mentioned 10 units chargeable and 2 units free). Basis the above, the issue under consideration is whether input tax credit is required to be reversed on the goods supplied based on commercial terms without consideration under the said transaction. One view on this issue is that the free goods supplied are not in the nature of ‘gifts’ but are akin to a quantity discount and thus, no input credit reversal should be required for the same. However, this view has to be formally confirmed by the GST authorities.

Free samples given to potential customers/ Gifts to dealers/ distributors – Company distributes its products as a part of marketing initiatives, etc. as free samples or gifts to dealers/ distributors for reaching targets such as gold coins etc. As per Section 17(5)(g), input tax credit shall not available for goods supplied as free samples. While currently, credit reversal is required, industry is representing that credit reversal should not be required as distribution of the said goods as free samples is required for promotion of the sale of these goods and are thus used in course and furtherance of business.

Further, while generating e-way bill for the same, industry should seek clarification regarding the taxable value to be reported on the e-way bill for such FOC supplies. Procedure/ mechanism for computation of credit reversal on account of goods distributed as free samples, used for personal use etc. is not clear in the law. Further, no specific provision is there in the CGST Act for requirement to reverse credit in case of free of cost services (such as free trips to customers on achieving certain targets, etc.).

Combo packs

There are various marketing campaigns operative in this sector to increase customer engagement and combo packs (combinations of different types of products) is a regular phenomenon. For combo packs where price breakup is also shown on the invoice, an issue may arise as to whether the same can be treated as mixed supply (and therefore taxable at highest rate applicable to the individual items) or individual supply (taxable at tax rates applicable to respective individual products).

Given the statutory norm, mere mention of the price breakup on the invoice may not always change the characterization of a mixed supply to an individual supply. However, there is no clarification on the practical constituents of qualifying as a mixed supply and the issue needs to ideally be analyzed based on facts of each situation.

Post-Sales Discounts (with additional obligations)

illustration: FMCG Companies providing additional discounts to retailers/whole-sellers for undertaking specific brand promotion activities, special sales drive, etc.

In such scenario, the discount so offered by the supplier is consideration paid (indirectly) by the supplier to the dealer/retailer to undertake such brand promotion activities, and hence this transaction is separate from the original sales (supply) made by the supplier to the dealers/retailers and is to be treated accordingly. Does it have any financial implications except increase in aggregate turnover to the extent of brand promotion activity?

Area based exemptions/ Benefits under State Industrial policy

In pre-GST regime, industry used to enjoy fiscal benefits in the North Eastern region, Himachal Pradesh, Uttarakhand and J&K in the form of excise duty exemptions/ refunds. Now under GST, those refund benefits have been withdrawn and are proposed to be compensated/refunded as budgetary support. The current proposal restricts refunds to the extent of prescribed percentage of CGST / IGST payout in cash (i.e. after adjusting all input credits) for units in the fiscal benefit zones for area based exemptions. 

SGST benefit for State Industrial policy.

This may result in substantial reduction of GST refunds as compared to the present benefits granted and may make certain units unviable. Further, it is to be highlighted that the proposed refund model seems to restrict the eligibility of refund to only actual manufacturers, thereby not addressing concerns related to principal manufacturers who operates through business models such as third party manufacturer (3Ps) and job working arrangements, mainly in Himachal & Uttarakhand. Thus, the quantum impact of such change in the benefit schemes should be carefully evaluated to enable that the principle of promissory estoppel is not deviated from.

Also, if the flow of benefits stand altered (eg. Benefit earned per year in absolute terms remains constant), the question whether this be factored as a cost increase for anti-profiteering purposes needs to be debated. Further, some industry players have filed writ petitions against this reduction in the quantum of benefits, which are currently pending.

Impact of GST on FMCG business costing-

Logistics costs

The GST has put up a positive effect on reducing the logistics cost, which has benefitted the FMCG companies a lot. GST is helping the FMCG companies to save some amount of logistic and transport charges. Previously, the distribution costs was around 2 to 7% of the total cost, but now it has now dropped to 1.5%. Now, at least, the companies save their costs and do more towards the society’s welfare. So, the GST has impacted in a very positive way for companies, as they have made the supply chain management to run smoothly and effectively, in regards to timely payment of tax, correct claims of input credit, and CST removal too. This tax deduction in logistics and transports have benefitted the consumers to avail the company products in much cheaper rates.

Warehouse

Warehouses are used to distribute the goods locally. The finished goods from the factory arrives at warehouses and they get distributed to retailers and customers in the specific areas. Previously, the warehouses were set up on at those states where the effective tax were low, and this also affected the transport costs for the distributors and the manufacturers. But now, the distributors and the manufacturers don’t have to worry about their costs, as GST is helping them to cut their costs. With the execution of GST in the country, the FMCG companies can set up their warehouses anywhere, in any state.

Foreign Investment

The foreign investments has now increased in India. Our country is now a unified market. Thanks to GST. The FMCG goods that are manufactured in India has now become more competitive in the international markets, because of its low production cost. As the GST has reduced its export cost and production cost both. The implementation of GST has lowered almost all taxes and made it easier for manufacturers and business owners to sell in the global and international market without any hassle.

Business Cost

The GST implementation has reduced all taxes and some taxes have been totally removed from the Indian Market and the CST has been removed under the GST regime. The CGST and SGST has replaced many other taxes such as Service Tax, Central Excise Duty, Custom and Octroi Duty etc. You might have noticed these replacements and cost reductions on your restaurant bills, shopping bills. It feels really good, when you see your money is getting saved on your bills. The business cost have also been reduced and totally cut. GST have changed VAT. Now if you are a business owner, you don’t have to pay the different amount of taxes in every state.

Road Ahead

Rural consumption has increased, led by a combination of increasing income and higher aspiration levels. There is an increased demand for branded products in rural India .On the other hand, with the share of unorganized market in the FMCG sector falling, the organized sector growth is expected to rise with increased level of brand consciousness, augmented by the growth in modern retail.

Another major factor propelling the demand for food services in India is the growing youth population, primarily in urban regions. India has a large base of young consumers who form majority of the workforce, and due to time constraints, barely get time for cooking. Online portals are expected to play a key role for companies trying to enter the hinterlands. Internet has contributed in a big way, facilitating a cheaper and more convenient mode to increase a company’s reach. The number of internet users in India is likely to reach 1 billion by 2025. It is estimated that 40% of all FMCG consumption in India will be made online by 2020. The online FMCG market is forecast to reach US$ 45 billion in 2020 from US$ 20 billion in 2017.

It is estimated that India will gain US$ 15 billion a year by implementing GST. GST and demonetization are expected to drive demand, both in the rural and urban areas, and economic growth in a structured manner in the long term and improved performance of companies within the sector.