Mumbai: Prices of a large variety of consumer goods are expected to come down after the goods and services tax (GST) Council decided to move 178 items from the highest tax bracket of 28% to 18% on Friday. However, restaurants are expected to increase menu prices since, despite a lower rate of 5%, they won’t be able to claim input tax credits.
Items that will now be taxed less include liquid soaps, detergents, razors and after-shave products. The changes will come into effect by 15 November.
Among the biggest beneficiaries of these lower rates is Hindustan Unilever Ltd, the country’s largest packaged goods firm. In the quarter ended September 2017, HUL made 33% of its total revenue from the home care segment which includes detergents and dishwashing soaps.
“It is a welcome step which will benefit the consumers,” an HUL spokesperson said. “HUL will be delighted to pass on the net benefits at the corporate level to the consumers”.
HUL will also benefit from lower rates on cosmetics and deodorants that make up its largest business segment—personal care. All these goods have been moved from 28% to 18%. Among HUL’s brands in this space are deodorant brands Rexona and Axe, and cosmetics brand Lakme.
Detergent makers also welcomed the move and said they will pass on the tax benefits to consumers.
“Reduction in daily consumption items such as detergent, dish wash etc is a welcome change,” Ullas Kamath, joint managing director of Jyothy Labs Ltd (JLL), said in an emailed statement. “This will help enhance consumption and improve customer sentiment considerably. Prior to GST implementation, the tax slab for JLL was at 21% and post GST it has come down to 17%, a reduction of 4% points, which will be passed on to the consumer in entirety. This move will also add further uptick in the rural demand which showed signs of improvement in Q2 (quarter ended September 2017),” he said.
Among other lower taxed personal care goods are razors and shaving goods and after-shave lotions and grooming products. This is likely to benefit companies like Procter & Gamble Health and Hygiene that owns the razor market leader Gillette.
A spokesperson for P&G declined to comment.
“We welcome the GST Council’s decision to review & revise the GST rates on certain items of daily consumption from 28% to 18%,” Vivek Karve, chief financial officer of Marico Ltd, said in an email. “While the fine print is yet not available, based on what is being reported, we believe that most of the cosmetic items such as creams, gels, serums, deodorants will now bear a lower 18% GST rate. This reduction will make these products more affordable and will certainly aid consumption. Marico has been very proactive in terms of passing on the benefits of lower GST rates to consumers. We have already effected a circa 5% reduction in hair oils and 3-4% reduction in Saffola Oils post GST roll out in July.”
Marico makes men’s grooming products under its brands Set Wet, Parachute, and Beardo.
Chocolate will also be taxed at 18% instead of 28%. This is likely to benefit large chocolate makers including Nestle India Ltd, Hershey India Pvt. Ltd, and Mondelez Foods India Ltd, maker of Cadbury’s chocolates.
“We are delighted with this very progressive step that the government has taken to reduce GST rates for products like ours that are consumed by the masses,” a Mondelez India spokesperson said in an email. “We have always believed in keeping the interest of our consumers in mind and will pass on the benefits to them.”
However, consumer durables will continue to be taxed at 28%. Manufacturers say this will not affect sales.
“I am not at all disappointed because there was no reason to expect that rates on white goods would come down from 28% to 18%,” B. Thiagarajan, joint managing director of Blue Star Ltd, makers of air conditioners and other white goods. “Why should rates be lower than pre-GST tax rates? Had it happened, the consumer durables industry would have boomed, but there is no reason for this to happen. Companies would have become more competitive instead by trimming the supply chain. I think a future government may move to a two slab rate of say 5% and 18%. Then, I am guessing, the rates of white goods may be 18% but with a cess.”
The biggest blow came to restaurants. The government announced that eating out will now be taxed at 5%, the lowest tax slab. The catch is, they will no longer be eligible for input tax credits.
“This is absolutely regressive,” said Anurag Katriar, executive director and CEO of deGustibus Hospitality, that operates Indigo Deli and other restaurants. “Essentially, they have reduced the tax rate, but now your costs of rental goes up 18%, cost of goods and services goes up by 18%, I will not be able to claim any input credit on it,” he said. “This will increase restaurants’ capital requirements and operating costs, and this will shoot up prices everywhere,” he said.
Operating costs for restaurants may rise by nearly 10%, said Rahul Singh, founder of The Beer Café and vice-president, National Restaurant Association of India.
“The government feels that the restaurants have not passed benefits of lower GST rates to consumers. All I have to ask is, how do they know?” Singh asked. “Not even a single monthly cycle of GST is complete, GSTR1 and 2 have to be matched, I will get input tax credit, and then I can pass on benefits to the customers.”
However, he said, consumers will probably be pleased with an ‘optically’ lower number of 5% GST.
“Customers will not care about menu prices as much as they will care about seeing a lower tax rate,” he said, adding that the NRAI is asking the government to consider allowing input tax credits for rent, the single biggest expense for restaurants nationally.