Service tax hike likely to hit overall consumption
March, 03rd 2015
The Union budget proposal to increase service tax plus lack of any sops for consumers may impact overall consumption just when the consumer products industry looks to come out of its worst slowdown in a decade, say senior executives.
The service tax increase to 14% from 12.36% will marginally impact a host of categories including eating out, grooming, movies, phone bills and grocery shopping which, companies fear, will all add up to squeeze household budgets, dampening the industry's revival process.
"People are not feeling rich — which is key to fuel growth in a consumption-led economy like ours," said Varun Berry, managing director at biscuits maker Britannia Ltd. The consumer products sector grew about 7% in calendar 2014, its lowest in a decade, but is expected to rise to 10% this year. Many companies had started to see slight volume recovery in select categories in the last quarter performance and were hoping that the Union Budget could boost its momentum.
Berry said the budget belied high expectations of consumers and industry from the new government. "While there's a clear articulation of future intent, action on the ground will dictate how it translates into fuelling growth of the economy," he said. With falling prices of crude and palm oil, many consumer companies that use these commodities as raw materials were considering to slash prices to boost demand.
However, excise duty on various products including mineral water, aerated drinks and condensed milk could now lead to slightly higher price-tags, bloating the monthly grocery spends.
"The Budget is doing nothing to help consumption," said Kishore Biyani, CEO of top retailer Future Group that runs Big Bazaar hypermarket chain. "We have been working harder in the past few months to attract consumers and things like (increase in) service tax will derail it further," Biyani said.
Brick-and-mortal retailers in the country have been going through tough times, fighting dampening consumer sentiment that impacted footfalls plus deep discounting by online rivals that are increasingly wooing away Indian consumers.
The service tax increase may also adversely impact restaurants and grooming services such as beauty salons and spa. "The service tax hike will definitely impact the consumer's willingness to spend," said S Subramanian, CEO at Harsh Mariwala-promoted premium beauty services firm Kaya. "It would be better if the government does not keep increasing taxes on new-age categories like beauty services."
Amit Jatia, vice-chairman at Westlife Development that operates burger-and-fries chain McDonald's outlets across western and southern India, said the service tax increase will be implemented across all its restaurants as and when it is enforced.
"We would have to study the fine print to understand it completely, but it might impact the consumer as he would bear the additional burden," he said. Almost all quick service restaurant chains, including McDonald's, Domino's and Pizza Hut, have been reporting declining same-store sales over the past six-eight quarters, with consumers either eating out less or downtrading to lower ticket sizes. However, not everybody in the consumer industry is concerned about the service tax increase.
"Consumption picks up in periods of certainty, optimism and hope — that's the sweet spot in India right now. More money in the hands of consumers and the current low levels of inflation, will help consumption," said D Shivakumar, chairman & chief executive officer at PepsiCo India. Vivek Gambhir, managing director at Godrej Consumer Products, said the budget will boost rural consumption. "Rural consumption was a worry and the budget proposals will surely improve consumption due to higher job creation and various other schemes," he said.
"While there isn't much for the average middle class consumers, it will have a positive impact for long term growth," Gambhir added. The Indian economy is projected to grow 7.4% this financial year, up from 6.9% in 2013-14, as per the new gross domestic product growth series, released by the Central Statistics Office.