Impact of Gst

Topics: Value added tax, Tax, Indirect tax Pages: 21 (5204 words) Published: May 19, 2013

Indian FMCG sector with a market size of $13.1 billion is the fourth largest sector in the economy. A well established distribution network, intense competition between the organised and unorganised segments characterises the sector and makes it a unique sector. Even at the time of recession, growth in FMCG sector has not slowed down which makes it an important contributor for tax revenue. In fact, among the MNCs, their Indian arms have contributed more to parent entities than foreign counterparts because of the large market size and domestic consumption. This is one of the reasons why the government has never provided much direct incentives or benefits to this sector. From a tax perspective, FMCG sector has been constantly contributing at the highest rate to the government kitty, more so from the perspective of indirect tax on account of its nature of taxation which is levied on consumption rather than income. In India, indirect tax has a multiple tax structure — taxes at central level such as excise, service tax and customs, and taxes at state level such as VAT and entry tax. Further, there are local levies like octroi. On account of various taxes, the total tax impact on FMCGs is almost 20-30% which is among the highest in the world. From time to time, the government has provided certain benefits in the form of location incentive which has been utilised by the FMCG sector. For example, excise benefit granted in the state of Himachal Pradesh and Uttarakhand has made most of the FMCG companies to locate their manufacturing facility in the hilly states. These benefits were limited to companies that had set up their operations prior to March 31, 2010, due to which the companies were not able to expand their operations since the benefit would have not accrued to them. However, by a recent circular, the ambiguity has been cleared. Now, even expansion would be eligible for the benefit though the same would be restricted to the initial period of 10 years. This has brought a new lifeline to the FMCG sector, which would help them to expand their capacity. In addition to these multiple taxes, the real complexity for the sector is the variance in tax rates. Excise duty rate varies from 4% to 10%, and VAT rate varies from 4% to 15%. Further, what is more worrying is that there is no consistency of VAT rate for a same product in all the states. For example, health drink is taxable at 5% in Maharashtra, while the same product is taxable at 12.625% in Kerala. Though VAT was expected to have a unified tax rate system across the country, the same could not stand up to its expectation. Even after almost six years of the introduction of VAT, instead of moving forward from an ill-fated sales tax regime to a coherent VAT regime, we seem to be going backwards. The states have forgotten the basic principle of having standard tax rate across the nation. Most of the states have changed the agreed VAT rate of 4%/12.5% by either enhancing the VAT rate or toting up taxes in addition to VAT. Gujarat was the first state to increase the rate, followed by Andhra Pradesh, Haryana, New Delhi, Maharashtra and others. Also, there are various classification disputes which have not been settled under the VAT period. For example, whether ghee, which is used by both consumer and industries, can be classified under industrial input schedule? Also, whether entry for drugs and medicines would cover even medicated goods. Some states include the same while in other states the dispute continues. There are many such instances for which there is no answer. In such a scenario, tax authorities continue to levy tax on a whim and the industry has no alternative but to litigate with a hope that at some level good sense shall prevail. In addition to VAT and excise duty, there is Central sales tax. To trounce the CST impact, businesses have located themselves in each state, though the same was also done to get closer to customers. Presence of FMCG sector in almost all...
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