GST Shock: India's Top FMCG Brands Face Unexpected Profit Squeeze After Tax Cuts!

The recent Goods and Services Tax (GST) rate rationalisation has seen tax rates for many food and beverage products drop to 5%. While this benefits consumers, it has inadvertently created an 'inverted duty structure' (IDS) for Fast-Moving Consumer Goods (FMCG) companies. This anomaly arises because the tax rate on input services, such as marketing, advertising, logistics, and distribution, remains high at 18%, while the tax on the finished products is lower. This disparity prevents companies from fully utilising input tax credits, leading to significant working capital being tied up and putting pressure on profit margins.

Sunil D’Souza, MD & CEO of Tata Consumer Products, highlighted that the GST 2.0 reforms have complicated the process of obtaining refunds for input tax credits, a mechanism that was smoother before. Executives warn that if this situation persists, it could significantly dent profitability. Dabur India has estimated a potential hit of Rs 90–100 crore to its profit and loss accounts due to this working capital blockage. To mitigate this, Dabur's CEO, Mohit Malhotra, mentioned renegotiating vendor pricing to avoid increasing product prices, which would contradict the aims of the GST reforms.

Furthermore, companies are grappling with the loss of fiscal benefits in tax-free zones post-GST 2.0, forcing them to re-evaluate manufacturing strategies. Britannia Industries is reportedly in discussions with state governments about this issue. Dabur is also adapting its manufacturing footprint, investing in a new plant in Tamil Nadu. These challenges arise as FMCG firms had set ambitious growth targets for the second half of FY26, aiming to boost sales following a subdued first half impacted by unseasonal rains and GST transition.

Impact This news directly impacts the profitability and strategic planning of major Indian FMCG companies, potentially leading to stock price volatility for affected entities. The sector's contribution to the Indian economy means this could have broader implications. Rating: 8/10

Difficult Terms: Inverted Duty Structure (IDS): A situation where the tax rate on raw materials or intermediate goods (inputs) is higher than the tax rate on finished goods (output). Input Tax Credit (ITC): A credit mechanism under GST that allows businesses to reduce their final tax liability by claiming taxes paid on inputs and services used in their business. Profit and Loss (P&L) accounts: A financial statement that summarises a company's revenues, costs, and expenses over a period.