Mixed feelings following ‘game-changing’ GST introduction in India

Speaking to Business Standard, the influential chief executive of Niti Aayog, an industry think tank, said that the standardised rate will benefit domestic production while battling inflation. 

“The GST will benefit local manufacturing and exports. It will give a huge impetus to ‘Make in India’ [a government flagship manufacturing policy]. There used to be a lot of taxes on the final product but, after GST, there will be one tax​”, said Amitabh Kant.

“I think inflation may come down even further so we should not be worrying about that​.”

The “game-changing​” tax will bring more formalisation to industry, while bringing increased revenues to the treasury, allowing India to invest more in health, education and nutrition, he added.

A controversial policy central to Prime Minister Narendra’s government policy, the sales tax is expected to end 11 years of argument between central government and the states that had previously raked in local taxation.

Yet snack manufacturers said they anticipated a hit on sales due to increased taxes, which now fall under a number of bands, and increased levies on potato chips, from 5% to 12% under GST.

This has made wholesalers and retailers nervous about an anticipated hit on their margins. 

Chandubhai Virani, founder and managing director of Balaji Wafers, one of India’s big snack players, said his company would compensate its 700 distributors to the tune of 3-4%, and would not yet hike its prices.

Biscuit makers, however, will expect to see taxes increase to 18% under the new regime. For companies like Parle, another big Indian snack business, this will affect high-volume margins paid by poorer consumers.

Mayank Shah, who is in charge of its biscuits division, said that a tax hike would prevent differentiation between Parle’s various lines.

“Usually, low-price, high-nutrition biscuits that are priced below Rs100 (US$1.55) per kilogram are consumed by the poorest of the poor. We have made representations to the government to put this category outside the 18% tax bracket​,” he said. 

“These rates will change the market dynamics. The unorganised sector will flourish and the government will not be able to tax it. Consumers will get access to poor quality, loose form biscuits​,” Shah told Business Standard​. 

With sales worth Rs90bn (US$1.4bn), Parle biscuits account for over a third of the market—while its Parle G line makes up for almost half of the company’s revenues. 

“Parle G is more of a staple than a biscuit for a large number of consumers who start their day with a chai and a pack of Parle G​,” Shah said. 

Parle is currently lobbying the central government to change the tax rate for the snack category; otherwise, it might have to affect a price hike. 

“With something like glucose biscuits, you are working with very narrow margins. There is no room to work around​,” Shah said. 

Elsewhere, to avoid the 5% levy on branded grains, small-scale manufacturers of pulses, rice and poha will likely ditch registered brands. 

Speaking to Times of India​, one daal processor said it would not be possible to for companies to survive otherwise, as margins would merge. To ensure continuation, “most industry players would market non-registered goods​”, he said. 

Under GST, grains had been exempted from taxes, though authorities have fixed a 5% slab for registered and branded commodities. 

It is expected that minor traders will suffer most due to limited business, whereas big players will easily absorb the hike.

"Small manufacturers sell goods to wholesalers and semi-wholesalers. It is not possible to pass on this increase to retailers, which means we will have to take the plunge​.”

Many essential goods, including unpacked food grains, gur, milk, eggs and salt will not attract GST. Some services will get costlier, however, as banking and financial services have been put in the 18% rate slab, compared to 15% beforehand.

Since its implementation some retailers have reported problems with online registration, after the official policy site had crashed more than once following implementation, leaving retailers unsure of their obligations.

However, one seller that experienced difficulties said that sales had been better than normal following GST.

"We are yet to figure out the rates for many of the items on the inventory list. Many of our smaller outlets in Kerala and Tamil Nadu have stopped billing. We have advised our franchisees to convert to tally to avoid confusion—some of them still use local software for billing​," said Landmark Group chief executive Jerry Mathews.

“But we have had bumper sales. Usually June is a busy month because of back-to-school sales. But this June, GST clearance sales were higher than New Year, Christmas and Onam sales​,” he added.

More from India…​

Blendhub opens services hub in India​

Food powder multinational Blendhub’s services unit will open its second hub in India to host food powder blends for the Indian market.​

Premium Ingredients Food Services India, which supports food brands with formulation, raw material purchasing and supply chain optimisation, will also introduce into India a service that gives companies access to powder blends anywhere in the world at the lowest price.

CloudBlending allows Indian companies to optimise their costs while positioning themselves in any market, domestically and worldwide. This will help businesses solve challenges in product development, personalisation and logistics, Blendhub said in a statement. 

It is supported by a global network of Cloud-based hubs and the knowledge of a worldwide community of thousands of agri-food professionals. “The model adds instant value to any product and allows it to manufacture anywhere with top quality and controlling and analysing every batch of the final product,” the company added.

The new Chennai facility is part of Blendhub's growing network which plans to introduce 40 hubs in the coming years, including its operational hubs in Spain, Mexico and Dubai.

Market update: India’s dairy growth​

Despite a Rs5tr valuation in 2016, 80% of India’s diary industry remains unorganised. According to analysts, this indicates that its potential can be tapped by ambitious dairy companies.​

High-premium products, including branded yogurt, probiotic dahi, specialty cheeses, account for just 5% of revenues. 

These categories, whoever, maintain the greatest margin potential within the dairy segment, and remain the focal point for multinationals like Nestlé and Danone, according to Research & Markets, an analyst.