Mumbai: Consumer packaged goods companies such as Hindustan Unilever Ltd (HUL), Godrej Consumer Products Ltd (GCPL) and Dabur India Ltd are reaching out to distributors and modern trade retailers to allay fears of losses that could occur during the transition from the current tax regime to the goods and services tax (GST) starting 1 July.
Retailers and distributors (channel partners) fear they may incur losses while selling the old stock lying with them after 1 July, said Sachin Menon, partner and head, tax, KPMG India.
“Channel partners are returning goods to manufactures and reducing their inventory levels so that they have no loss,” said Menon, adding, “therefore some manufacturers are guaranteeing compensation.”
For instance, HUL, the country’s largest consumer packaged goods company by sales, wrote to all its modern trade partners on 31 May, extending support for the smooth implementation of GST from 1 July. In the email, a copy of which was seen by Mint, HUL said that it understands “a possibility of differential tax incidence on closing stock when the cutover from current taxes to GST happens.” The maker of Lux soaps, Surf detergents and Knorr soups assured retailers, “..the same will be reimbursed subject to fulfilment of necessary conditions and documentation as will be intimated.”
“As a matter of policy, we do not comment on mutual terms of trade with our distributors and other business associates. Hence, we have no specific comments to offer on your questions,” an HUL spokesperson wrote to Mint.
“There is uncertainty in the retail and wholesale channel,” said Sunil Kataria, business head for India and Saarc at GCPL, referring to treatment of opening stock that channel partners would hold on 1 July.
“We are in talks with channel partners and will do what is in the right interest of our partners and our business,” he said. According to Kataria, even if some de-stocking happens, the pipelines will be replenished by mid-July.
About a year-ago, GCPL had created a task-force to prepare for GST and is now reaching out to partners across media agencies, wholesalers and distributors as it gets ready to make the switch.
Lalit Malik, chief financial officer of Dabur India said, “We will be supporting our distributors and trade partners for smooth transition to GST by helping them liquidate their transition inventory, while ensuring that there is no loss of sale at the retail level.”
Retailers and distributors (channel partners) fear that post GST implementation, they could incur losses on old stock for which excise duty invoice is not available and the new GST rate is higher than value-added tax (VAT) rate in the old tax regime.
In case of such goods, the channel partners will be able to claim input credit of just 40% of CGST (central tax), which may not be able to compensate for higher GST tax rate. For instance, if GST for one such good is 18%, the input credit that can be claimed will be just 3.6% (which is 40% of the CGST at 9%).
“There is certainly going to be turbulence around pricing until the new pricing comes in,” said Anil Talreja, partner at consulting firm Deloitte Haskins and Sells.
To be sure, the new pricing will take some time to be rolled out. “There is a planning cycle which involves the new MRP to be printed among other things,” said Vivek Karve, chief finance officer, Marico Ltd adding, “It will happen in the second quarter but it’s premature to discuss the timing.”
For instance, in categories such as pickle and paste, the current taxes levied are in the range of 6-8% VAT plus 2% excise but with the roll-out of GST, the taxes applicable will be 18%. This is an increase of 10 percentage points. “It will directly impact business growth and profitability, especially for price sensitive food categories,” said Sanjana Desai, head business development, Desai Brothers Ltd – Food Division (Mother’s Recipe).
The company is anticipating the business would take a hit for the initial few months because of reduction of inventory, and volumes may be impacted even after that for certain categories where the taxes have increased. Further, “the pending stocks with distributors and warehouses on 1 July will result in losses for the company,” said Desai.