Corporate tax cut likely to help demand, make consumer goods cheaper

In the run-up to the festive season, there is some good news for consumers — prices of fast-moving consumer goods (FMCG) are likely to fall after the government cut corporation taxes on Friday.

FMCG sector experts said consumer goods will be one of the biggest beneficiaries of the tax cut. Some of these benefits are likely to be passed on to consumers in the form of lower prices.

“Consumer companies are likely to partially cut prices,” said Abneesh Roy, senior vice-president, research (institutional equities), Edelweiss.

“When the goods and services tax (GST) on consumer goods was cut, there was a demand spurt. While the environment is different now, notional saving or propensity to spur demand for consumer goods is likely,” said Roy. 

Segments such as biscuits, soap and packaged tea have been slowing over the past few months. 

Anil Talreja, partner at Deloitte, said, “If there is an overall reduction of taxes, it is going to directly benefit consumers.” 

Multinational FMCG companies such as Britannia, Colgate, HUL, ITC and GSK Consumers pay about 28-35 per cent of their profit in corporation taxes. 

HUL welcomed the tax rate cut, saying that this would lead to “spur in investment and growth”. On Friday, its stock hit a 52-week high on the National Stock Exchange. 

Britannia called it decisive leadership shown by the government. “It’s a concrete step to ease the current economic situation considering the present operating environment in the country,” said Varun Berry, managing director, Britannia Industries. 

The biscuits major had earlier announced an increase in the prices of its products marginally.

However, some companies such as Dabur and Marico, which pay taxes in the range of 10-16 per cent, are unlikely to gain significantly from the current move. 

“Since we are availing fiscal benefits, there will not be any material impact on our tax rates. That said, it’s a welcome move and will go a long way in improving the overall sentiments,” said Lalit Malik, chief financial officer, Dabur. 

The homegrown FMCG giant had in the previous financial year paid 16.2 per cent of their profits towards taxes.

Marico said the move is in line with the government’s intention of reducing the direct tax rates. "While the near term impact may be moderate, over the medium to long term, it will spur investments, employment and higher disposable income," said Vivek Karve, chief financial officer of the Mumbai-based company.

Bengaluru-headquartered consumer care major Wipro Consumer Care said this step of reducing the corporation tax rate would provide a significant boost to the “Make in India” initiative. 

“This would spur the slowing economy and start attracting investments in the manufacturing sector. This would, in turn, create a positive upward cycle by creating jobs and stimulating demand,” said Raghav Swaminathan, chief financial officer, Wipro Enterprises.

Cookie maker Unibic said the finance minister’s move had come at the right time and it would create investor confidence. “But such measures are medium- and long-term, so the consumption story will still be under pressure. However, sentiment will definitely change,” said Nikhil Sen, managing director, Unibic Foods.