Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
GST has unified India’s indirect tax system, cutting down logistics and compliance costs for FMCG companies.
Warehouse consolidation and input tax credits under GST have improved supply chain efficiency and cash flow.
Rate rationalization under GST has made many essential FMCG goods cheaper, boosting rural and mass-market demand.
Digitized compliance through GSTN ensures transparency and smoother business operations for FMCG firms.
GST promotes sustainable practices by enabling greener supply chains and incentivizing eco-friendly manufacturing.
The Fast-Moving Consumer Goods or FMCG is the largest sector contributing to the India’s economy, covering essential items like packaged food, beverages, toiletries, and OTC drugs. Before GST, the companies involved in the production of FMCG goods faced a complex tax structure with VAT, excise, and service tax, raising costs and disrupting interstate trade.
The introduction of GST simplified indirect taxation by unifying multiple levies into a single system. This reform has significantly impacted logistics, pricing, and supply chain efficiency while enhancing ease of doing business. India, being a leading FMCG producer and consumer, has seen improved competitiveness and reduced compliance burdens post-GST.Â
Let us explore how GST continues to reshape the FMCG sector across various dimensions.
The sector has consistently been one of the key growth drivers of the Indian economy and continues to attract foreign investments due to its scale, market penetration, and rising rural demand. FMCG companies often set up manufacturing and warehousing units in states like Himachal Pradesh due to earlier tax exemptions and benefits, though GST has brought more uniformity in this regard.
Meaning of GST (Goods and Service Tax)
GST is an indirect tax that falls under the comprehensive destination-based type for the supply of services and goods. It is an umbrella term covering several indirect taxes, VAT, excise duty, service tax, etc., thus establishing a common market in India. A critical aspect of the GST scheme is that it is a multi-stage tax levied on every level of the supply chain with provision for an Input Tax Credit (ITC) which gives relief to businesses from the cascading effect of taxes.
Under this regime, tax is collected at the point of consumption and therefore favors such states that consume. It also makes things easier through tax management and filing via the digital platform GSTN, which oversees all information technology management of GST-related compliance.
The FMCG sector is affected by GST implementation in the following ways:
1. Costs of Logistics and Warehousing
Prior to the goods and services tax (GST), FMCG companies had to build warehouses in different states to circumvent the burden of the Central Sales Tax (CST) while maximising tax exemptions. This led to higher logistical costs in transport and warehousing and inefficiencies in the supply chain.
With GST, these companies are now under a standard tax system where they can consolidate warehouses and improve distribution. Lessening logistics costs from 2%-7% of total costs to 1.5% in many cases adds significant savings as a positive consequence. This is helping improve supply chain management, optimise distribution networks, and cost reduction in the overall system.
2. GST Rates on FMCG goods
The rate of tax on the Fast-Moving Consumer Goods (FMCG) sector varies under GST, but overall, rate rationalization has led to cheaper rates for several essential items. Basic staples like rice, wheat, and fresh vegetables are taxed at 0%, while branded products like paneer or frozen vegetables attract a 5% tax, comparable to previous rates.
However, some products like ghee, cheese, butter, and dry fruits are placed under the 12% tax slab, leading to a cost increase for these items. Consequently, FMCG companies with product portfolios heavily reliant on such goods may witness squeezed margins due to higher tax payable.
Despite this, the broader reduction in prices of several company products due to tax deduction and Input Tax Credit benefits has improved affordability for consumers, thus driving demand.
3. Claiming Input Tax Credit (ITC)
One of the most impactful features of GST is the claim of credit through the ITC mechanism. Companies can now avail credit on taxes paid on input goods and services, such as packaging, logistics, and marketing. This eliminates the double tax cost that was prevalent under the previous tax system.
Moreover, the system enables correct claims of input credit through proper documentation and timely compliance. Entities registered as an Input Service Distributor (ISD) can distribute the credit among various units of the organization, further improving cash flow and reducing the business cost.
4. GSTN: A Specialised IT Network
The advent of GSTN has made compliance hassle-free for consumer goods companies. It provides an online tool where a company will issue invoices, file returns, track tax credits, and pay dues in time. This increased operational transparency eliminates unnecessary lags hampering an otherwise automated process.
Digitization will help the companies significantly track claims of input credit, control audits, and respond to constant tax rate notices more efficiently because of the digital ways of filing. This further reduces the compliance costs, thereby cutting costs in the long run.
5. Boost in Exports and Global Competitiveness
The introduction of GST has also impacted the export cost of FMCG products positively. With the refund mechanism of GST on exports and availability of ITC, businesses are more competitive in international markets. The seamless movement of goods across state borders has improved lead times and allowed FMCG companies to scale their operations beyond domestic boundaries.
This encourages foreign investments in the sector and positions Indian FMCG firms as global contenders.
6. Business Model Transformation
The FMCG industry is transitioning toward a more centralized and technology-driven model. Thanks to GST, companies are re-evaluating their cost structures, shutting down redundant warehouses, and opting for centralized procurement and distribution. This transformation has contributed to further cost for FMCG goods reduction and improved agility in the supply chain.
Also, FMCG companies are modifying their pricing strategies based on the applicable rate and restructuring promotional schemes to stay compliant with GST norms. This is particularly relevant when dealing with mixed supply, fresh supply, or individual supply scenarios where the time of supply plays a key role in determining the tax deduction and applicable GST rates.
The Influence of GST on FMCG Brand Loyalty and Consumer Behavior
The implementation of GST has subtly influenced FMCG brand loyalty and consumer behavior in India. By streamlining the tax system, reducing prices on many FMCG products, and improving affordability, GST has empowered consumers to make more cost-conscious decisions.
With reduced logistics costs and rationalized tax rates, brands have been able to offer more competitive pricing, making their products more attractive to price-sensitive consumers. As a result, there has been an increase in demand for FMCG goods, especially in rural areas, where price sensitivity is higher.
Moreover, the ease of purchasing goods across state borders, aided by GST’s uniform tax structure, has led to greater product availability and brand presence in previously underserved markets. This wider accessibility has enhanced brand loyalty as consumers develop stronger connections with familiar products. Over time, brands have adapted their marketing strategies to align with evolving consumer preferences shaped by GST-driven price adjustments and better availability.
GST's Contribution to FMCG Sector Sustainability Practices
GST has induced changes indirectly towards sustainability practices in the FMCG sector by promoting efficiency across supply chains. The integrated tax structure allows businesses to amalgamate operations reducing multiple warehouses and transportation routes.
As a result, logistics carbon footprints have shrunk further contributing to the environmental sustainability angle. Also, the Input Tax Credit (ITC) scheme motivates business owners to utilise sustainable raw materials and processes through credits on ecologically friendly packaging and energy-efficient manufacturing methods.Â
When companies have changed for digital compliance for GST hence they are paperless on invoices and all other documentation, yet minimizing waste. In addition, tax refunds on exports, under GST, have further encouraged the adoption of cleaner production methods across the FMCG market so that their operations conform to international sustainability standards in production.
Hence, while reevaluating their supply chains and production layouts, it has become an important agenda for the companies as it is tax beneficial as well as for consumer demand for green products.
There is a direct positive correlation between GST and the FMCG sector as far as the indirect tax system is concerned. It also brings down the production cost and distribution costs while improving supply chain efficiency. Ultimately making products cheaper for consumers, while businesses gain a lot from cost reduction and simplified compliance. It has so far become a market that has faced all the challenges thrown at it and stood the test of time to grow in a steady manner.
The elimination of multiple tax layers and the provision of input credits emphasize an increase in operations for companies looking to expand into rural areas and overseas, thereby boosting competitiveness. The sector has yet to mature, but the paradigm of GST is an ever-evolving vehicle for further strengthening this FMCG sector's prime contribution to the matured upcoming economic growth of India.
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FAQs
How has GST simplified the tax structure for FMCG companies?
Before GST, FMCG companies had to navigate a maze of indirect taxes like VAT, CST, excise, and service tax. This fragmented system led to higher costs and operational inefficiencies. With the introduction of GST, all these taxes were merged into a single uniform tax, enabling easier compliance, reducing paperwork, and streamlining business operations across state lines.
What impact has GST had on logistics and warehousing in the FMCG sector?
GST removed the need for multiple state-wise warehouses that were earlier set up to avoid CST. Companies can now consolidate their warehouses and centralize distribution, leading to lower logistics costs, faster delivery, and optimized supply chain networks. This has significantly boosted efficiency and cost-effectiveness in operations.
What is the role of Input Tax Credit (ITC) in reducing FMCG business costs?
The ITC mechanism under GST allows FMCG companies to claim credit for the tax paid on inputs like packaging, logistics, and marketing. This helps eliminate the cascading effect of taxes and reduces the overall tax burden. Improved documentation and compliance under GSTN also ensure better credit tracking and enhanced cash flow for businesses.
Have GST rates made FMCG goods more affordable for consumers?
Yes, GST has led to reduced tax rates on many essential FMCG products like grains, fresh vegetables, and unbranded foods, making them cheaper. However, some processed items like butter, cheese, and dry fruits are taxed higher at 12%. Overall, affordability has improved due to rationalized rates and ITC benefits passed down to consumers.
How does GST support sustainable practices in the FMCG industry?
By allowing businesses to consolidate operations and reduce redundant transportation, GST helps cut the sector’s carbon footprint. Digital invoicing minimizes paper usage, and ITC benefits encourage the use of sustainable materials and energy-efficient production. It also aligns domestic FMCG practices with global environmental standards, boosting green competitiveness.
Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
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