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GST & FDI in retail a must for Budget 2012: FMCG sector
March, 13th 2012

When it comes to consumer goods and retail sector, there is a lot to be expected from the Budget Session, especially the issue of taxation and foreign direct investment (FDI) in retail.

Taxation is important for the sector as higher taxes mean higher prices which always has a negative impact on the demand for a specific good. Moreover, there is the introduction of Goods and services Tax (GST) which is being debated for for a long time now.

GST does not depend merely on the Union government and negotiations are on with the state governments. Reuters
GST does not depend merely on the Union government and negotiations are on with the state governments. If an uniform GST comes into play, it will mean doing away with multiple other taxes like octroi, central sales tax, value added tax and entry tax. This could make consumer goods cheaper and boost demand for the FMCG sector.

Since negotiations with states have so far proved to be inconclusive, implementation of GST in this Budget is unlikely. What is awaited, therefore, according to experts, is a timeline for the GST to come through. If a timeframe is mentioned, it will be a positive for FMCG companies.

Rakesh Biyani , Director, Future Group told CNBC TV 18, "I think there is a need for the GST regime to come in. I think somewhere rationalisation of taxes, certain reforms in allowing more foreign investment in the economy would once again the revive the sentiments of the consumer."

For FDI in retail, the government had allowed FDI in multi-brand retail but had to revoke it due to opposition from other parties. The government might bring back FDI in retail with more consensus in the BudgetSession which would be a huge boost for the retail sector.

Among FMCG companies, ITC awaits?an excise duty hike on cigarettes after no duty rise last year. The consensus seems to be a 10 percent hike, but markets could give a negative reaction if the hike goes closer to 15 percent, said a Kotak report. However, being the market leader that ITC is subsequent drop in the stock price could be an opportunity to buy.

Excise duties which had been cut by 200 bps (100 bps= 1 percent) as a stimulus to the consumer players could be brought back again. A Deutsche Bank report says while companies like Marico and Dabur won't be affected since they have manufacturing facilities in excise exempt zone, Asian Paints will get impacted and would have to pass on the burden to customers.

Finally, the FMCG and retail sector will watch the income tax levels closely as well. Increase in income tax slabs (particularly hike in the maximum exempt slab) will mean lower tax outgo. This pulls up disposable income and will be a positive for the sector.

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