The transition of GST on aerated beverages from slab rate and cess component to a consolidated 40 per cent levy could pose as a challenge for FMCG distributors and traders. These FMCG distributors are now getting ready to knock the door of the Finance Ministry.
As of date, all goods (including aerated waters) containing added sugar or other sweetening matter or flavoured, caffeinated beverages, carbonated beverages of fruit drink or carbonated beverages with fruit juice attract GST at 28 per cent. At the same time, a compensation cess at 12 per cent is levied on aerated waters, lemonade and caffeinated beverages besides other. With effect from September 22, all these beverages will attract a flat 40 per cent rate to maintain the incidence of taxation as compensation cess has been withdrawn.
Since inputs for the beverage companies will be in 5 per cent and 18 per cent slabs, the companies will not have any problem from September 22. However, dealers and distributors will not be able to utilise compensation cess paid on unsold stock on or after September 22. Explaining it further, an tax expert said, the change from a split levy (28 per cent slab rate and 12 per cent compensation cess) to a consolidated 40 per cent levy on carbonated beverages is largely a structural shift with significant implications for traders.
Traders who had accumulated input tax credit (ITC) of compensation cess may find themselves unable to set it off against future liabilities, as the new framework eliminates the compensation cess component. This creates stranded ITC, effectively converting it into a sunk cost. For smaller traders and distributors with thinner margins, this adds to working capital pressures, he added .
“If these stranded credits are not allowed to be carried forward or refunded, the cost burden is likely to ripple across the value chain. Larger players may absorb it in the short term, but traders and mid-tier distributors, who are often more cash-sensitive, are expected to pass on part of this burden, potentially leading to a marginal rise in consumer prices or tighter discounts at the retail level,” he said.
This comes at a time when beverage industry witnessed a washout summer season due to early rains. The industry will be hoping to make up for some of this volume decline in the upcoming festival season. Analysts said that policymakers may need to issue clarifications or transitional provisions to avoid unintended cost escalations for traders and, ultimately, the consumers.
Another tax expert said, ”Trading companies dealing in aerated beverages having accumulated ITC of compensation cess paid on past procurements, would not be able to utilise such credits going forward, and this unutilised input cess could become a cost, which is an area of concern for such companies. “
Meanwhile, the President, the All India Consumer Products Distributors Federation said,” We will be raising this matter with the Hon’ble Finance Minister, as crores of rupees in working capital will be unnecessarily blocked due to this situation, creating immense stress on distributors and the retail ecosystem.”
