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Budget's impact on the FMCG sector

Last updated on: July 11, 2014 19:48 IST

FMCGBasic Customs Duty on fatty acids, crude palm stearin, RBD and other palm stearin and specified industrial grade crude oils being reduced from 7.5% to Nil for manufacture of soaps and oleo chemicals subject to actual user condition.

Basic Customs Duty is also being reduced on crude glycerine from 12.5% to 7.5% in general and from 12.5% to Nil for manufacture of soaps subject to actual user condition.

Excise duty is being reduced from 12% to 6% on footwear of retail price exceeding Rs 500 per pair but not exceeding Rs 1000 per pair.

Footwear of retail price upto Rs 500 per pair will continue to remain exempted.

Excise duty on cigarettes is being increased by 72% for cigarettes of length not exceeding 65 mm and by 11% to 21% for cigarettes of other lengths.

Similar increases are proposed on cigars, cheroots and cigarillos.

Basic excise duty is being increased from 12% to 16% on pan masala, from 50% to 55% on unmanufactured tobacco and from 60% to 70% on jarda scented tobacco, gutkha and chewing tobacco.

In the budget for FY15 announced by the new central government, the following key changes to excise duty on cigarettes were made:

Excise duty for cigarettes between 65-70 mm in length was raised to Rs1,650 per thousand sticks (up 17% yoy), for cigarettes between 70-75 mm it was raised to Rs2,250 per thousand sticks (up 11% yoy), for cigarettes between 75-85 mm it was raised to Rs3,290 per thousand sticks (up 21% yoy) and for cigarettes longer than 85mm it was retained at Rs3,290 per thousand sticks.

Excise duty on cigarettes below 65mm in length was raised to Rs1,150 per thousand sticks, up 72% yoy.

Raised the personal income-tax exemption limit by Rs 50000 that is, from Rs 2 lakh to Rs 2.5 lakh in the case of individual taxpayers, below the age of 60 years. Exemption limit raised from Rs 2.5 lakh to Rs 3 lakh in the case of senior citizens.

The Finance Minister has reiterated the Government’s commitment to enact the Indian Financial Code for better governance and accountability, in close consultation with all stakeholders.

While the impact of these measures will be realized in the medium term, he has proposed in the budget some measures such as liberalizing the ADR/GDR regime for depository receipts and extending 5% withholding tax to bonds issued by Indian Corporates abroad.

The budget proposes adoption of the new Indian Accounting Standards by the Indian companies from the financial year 2015-16 voluntarily and from the financial year 2016-17 on a mandatory basis.

Foreign dividends received in financial year 2014-15 and subsequent financial years shall continue to be taxed at the lower rate of 15%.

In order to encourage the companies engaged in the business of manufacture or production of an article or thing to invest substantial amount in acquisition and installation of new plant and machinery, Finance Act, 2013 inserted section 32AC in the Act to provide that where an assessee, being a company, is engaged in the business of manufacture of an article or thing and invests a sum of more than Rs100 crore in new assets (plant and machinery) during the period beginning from 1st April, 2013 and ending on 31st March, 2015, then the assessee shall be allowed a deduction of 15% of cost of new assets for assessment years 2014-15 and 2015-16.

As growth of the manufacturing sector is crucial for employment generation and development of an economy, it is proposed to extend the deduction available under section 32AC of the Act for investment made in plant and machinery up to 31-03-2017.

Industry Expectations

Concrete announcement regarding roll-out of GST.

Personal income tax exemption limit should be increased to Rs 500,000.

Length based specific excise duty structure on cigarettes be retained.

The rate of Central Excise duty on the 65 mm filter cigarette slab be reduced from the existing level of Rs 689 per thousand cigarettes to Rs 200 per thousand cigarettes

Budget Impact

Increase in tax exemption limit by Rs 50000 is positive for the FMCG sector, as it will leave more discretionary income in the hands of consumers.

The exemption in custom duty on crude glycerine, fatty acids, crude palm stearin, RBD and other palm stearin and specified industrial grade crude oils will definitely help the gross margin of two major companies HUL and Godrej Consumer Products, the two major players in soap manufacturers.

Excise duty on cigarettes is being increased by 72% for cigarettes of length not exceeding 65 mm and by 11% to 21% for cigarettes of other lengths is a bad news for cigarette manufacturer. Cigarettes have seen increased in excise duty by 18% and 21% in last 2 budgets, which has impacted it volume.

ITC is expected to pass on this entire hike to consumers.

Reduction in excise duty from 12% to 6% on footwear of retail price exceeding Rs 500 per pair but not exceeding Rs 1000 per pair is positive sign for Bata India.

It is expected to partly pass on benefit to customers.

Stock to watch

ITC, Godrej Consumer, HUL, Bata India, Relaxo Footwear

Outlook

The Budget was Positive for the FMCG sector.

FMCG industry for last fewquarters was suffering from falling volume and fall in growth rate.

The deteriorating macro economic factors are resulting in slowdown ofdiscretionary spending keeping the volumes under pressure.

The rise in income tax slab is positive to FMCG sector, as rise in disposableincome will flow towards discretionary spend.

Also cut in custom duty on raw material of soap is positive thing for HUL and Godrej Consumer Products (GCPL), the two major players in soap manufacturers.

Footwear makers like Bata India will see its margin growth in coming quarters with cut in excise duty.

The bad news is only for cigarette manufacturers. It has once again seen increase in excise duty.

The volume for ITC, biggest cigarette manufacture, which is in negative territory for last 4 quarters, is expected to be there in coming days also.

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