No agreement on why Consumer Goods Demand Rose after GST

Narendra Kumar

23 Mar, 2021

Providing massive relief to consumers, the 23^rd GST council meeting changed the GST tax rates lowering it for consumer goods, changing the tax slab from 28% to 18% for various consumer products.  In this update, we’ll discuss GST, GST tax slabs for consumer goods, how the distributors don’t see an increase in consumer goods due to GST, and whether it is just premiumization or not.

In the old tax rate system, before GST came into existence, the central government use to levy excise duty when the goods were made in the factory and later on the state government used to charge VAT on top of that. That meant the consumer had to pay VAT on the base price and the excise duty as well.

But this pattern was eliminated after the introduction of GST. The Goods and Service Tax^[1] is levied only at the consumption end of when the final consumer buys the product.

GST Tax Rates on some consumer goods

Is it the after-effect of demonetization?

• After the initial disruption caused by the introduction of goods and service tax, the supply chain emerged helping the consumer good makers’ volume to jump. But it did not send a clear picture as to why.
• All the makers of consumer goods, be it, makers of soaps or biscuits, they all claim lower GST tax rates have driven to higher demand among consumers. But the distributors and the retailers aren’t sure if that is what has caused the trigger in demand and attribute it largely to the recovery of the market after the twin distraction of demonetization and GST.
• The wholesale demand has slowed down in the recent past due to the introduction of GST. In 2017 the GST Council has reduced the number of fast-moving consumer goods attracting a tax rate of 28% from 224 to 50. That brought a host of consumer products like shampoos, soaps, and detergents in the 18% tax bracket. The Companies were supposed to pass on the benefit to the consumers by decreasing the prices.

Is the rise in demand for consumer goods due to GST?

The distributors and the retailers’ claim that the lower prices didn’t actually add to the demand rate. The volumes have jumped at the lower base as demand had slowed first because of the overhang of demonetization and the initial challenges faced while implementing GST.

One retailer in Maharashtra said the consumption has grown organically and not due to the rate cut. A distributor from Mumbai said, 2018 was the year of growth, which cannot be solely attributed to the rate cut only. Many distributors claim that the prices went down only for the initial six months, and now they are higher by 5% on average due to hike in prices by companies.

Moreover, the distributors witnessed that some consumer goods makers increased weight instead of lowering the prices. Anti-profiteering penalty has been imposed on market leaders Hindustan Unilever Ltd and Nestle India for not decreasing the prices.

Is it Premiumisation or Formalization?

According to a distributor from Punjab, consumers are upgrading to premium products nowadays. H says that if a person earlier uses to buy four bars of soaps for his consumption, now the rate cut has shifted his preference to a more premium brand. He further adds on that the overall uptick in the consumption rate is not because of GST.

• A retailer from Nagpur has noted similar instances of the shift to more premium brands after the GST rate cut. But, he added, producers of consumer goods have been pushing premium products in smaller packs.
• Dabur’s Duggal says, he doesn’t see any premiumization. He agreed there is a higher demand for smaller products, citing the example of shampoo sachets for Rs 1 each, but that is due to deeper penetration and a higher level of consumption.

There has been a shift from loose to packed and branded items. Smaller packs account for 20-30% of consumption, and in some categories, the lower GST has made that formalization possible. Because of deep discounting after the GST rate has improved off-take of larger packs.

Formalization of the economy after GST will increase the demand for branded products. Thereafter the companies will also need to ensure a direct distribution to compete with smaller regional players in the market.

• MD of Nestle India Ltd. Suresh Narayanan also doesn’t see premiumization because it’s more of a brand strategy rather than formalization. But he has a more nuanced view on volume growth; it can be attributed to a mix of everything. The overall sectoral growth is encouraging. But the GST alone didn’t push the sectoral growth, it only aided in that.

Conclusion

The recently introduced tax reforms have boosted the demand for consumer products. All in all, these changes make the tax compliance less cumbersome and easier for the market players.  The decrease in tax slabs will result in an increase in the sale of consumer goods by driving market sales and it’ll promote more production of consumer goods making it a win-win situation for all, the consumer, distributors and the manufacturers.

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