Demand hasn’t returned to normal in over two months after the Goods and Services Tax rolled out as distributors are still adapting to changes triggered by the nationwide levy, according to two large consumer goods companies.
Wholesale dealers are still familiarising themselves with the compliance required to switch to the new tax regime, chief financial officers of toothpaste-to-honey producer Dabur India Ltd. and Parachute hair oil maker Marico Ltd. said.
GST mandates monthly electronic filings and creates a tax trail across the business chain, and compliance has increased especially for small and medium businesses that maintained paper ledgers and managed inventory manually. The government has extended the deadline to file monthly returns to give them time to adjust to the changed tax structure.
Bulk dealers had cut inventory ahead of the July 1 implementation of GST fearing losses on existing stock. While companies promised to compensate distributors for losses, manufacturing activity as measured by Nikkei Manufacturing PMI Survey contracted in June and July, falling to its eight-year low as new orders fell.
The output expanded in August on the back of fresh orders, showing signs of a recovery. Companies responded to the improved environment by adding jobs and purchasing raw materials and semi-finished items, the survey said.
“Demand will improve from October onwards as distributors will have a better understanding of the GST system, aided by a good monsoon and the festive season,” Lalit Malik, CFO, Dabur India, told BloombergQuint. Malik expects the volume growth to be in a “high single digit” in the second quarter ending September.
Rural demand is marginally higher than urban due to increased penetration of the product portfolio and a better distribution reach of FMCG companies in villages, he said.
Marico hasn’t seen a rural revival yet. Rural demand is subdued and is slowly returning to normal, said Vivek Karve, CFO of the Saffola vegetable oil maker. Both the companies have lined up product launches for the rest of the year ending March 2018.
Dabur remains cautious. The company will study the demand before it actually rolls out its new launches, Malik said. The maker of Dabur Honey will, however, increase its advertising spend.
The GST transition pain hasn’t deterred Marico, which will go ahead with its new product launches.
A uniform tax structure reduces the need for maintaining multiple warehouses. Easier movement of goods under the nationwide levy means companies can increase the size of warehouses to drive economies of scale.
Both Dabur and Marico are consolidating their warehouses. Marico is looking to cut five warehousing depots over the next three to six months and bring the count to 27, Karve said.
“Dabur India too is consolidating its warehouses in order to drive synergies post the implementation of GST,” Malik said.