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GST impact on liquor: Prices may go up marginally as input costs rise

LiveMint logoLiveMint 29-06-2017 Deepti Govind

Bengaluru: Prices of beer, wine and hard liquor will go up by a few rupees a bottle for consumers after the rollout of the goods and services tax (GST) on 1 July, and even that increase will not happen immediately, according to industry executives.

From the companies’ perspective, the bigger hit will be on cheaper brands that operate on thinner margins than mid-market and premium brands as higher input taxes under the Goods and Services Tax (GST) regime erode their profitability.

Even that impact is not expected to last too long, and liquor firms expect the industry to stabilize in six to eight months, especially once the increase in cost is passed on to the end consumer.

Alcohol for human use has been kept out of GST but raw materials and packaging products are included in the new tax. That means liquor firms will incur higher costs but won’t be eligible for output credit. Since they are not eligible for credit, they won’t be able to offset the cost increase like other sectors.

“Raw materials such as molasses used to produce ENA (extra neutral alcohol) has been posted at 28%, i.e. an increase of 12.5% compared to the pre-GST tax structure, while a majority of dry packaging goods have been slotted at 18%, i.e. an increase of 3.5% to 5.5%,” said Sridhar Pongur, joint managing director of John Distilleries Pvt. Ltd, that makes single-malt whiskies under the Paul John brand.

Those new tax rates will push up production costs for liquor firms by between Rs25-40 a case on average, according to several executives. That will only mean an increase of, for instance, a rupee or two at retail outlets for a 180 ml bottle of an economy brand for the consumer. Hence, a price hike will not mean a dip in sales volumes.

Those few rupees will make a huge difference for companies, though, since they are looking to recover the increase in costs from consumers. The catch is liquor firms have to approach state governments, which handle the distribution of alcoholic beverages in nearly 65% of the country, with requests to increase prices and wait for approval.

If state governments increase prices for liquor firms by between Rs50 and Rs70 per case, that should help offset the rise in costs, said single-malt maker Amrut Distilleries Pvt. Ltd’s executive director Rakshit Jagdale.

“The industry has taken a lot of hits in the current year as a result of demonetisation and the highway ban. State governments have also taken a hit in their revenue collection. Some equilibrium has to come about and the state governments seem to be working in that direction,” said Deepak Roy, executive vice-chairman of Allied Blenders and Distillers Pvt. Ltd, makers of Officer’s Choice whisky.

Another executive at a liquor firm, on condition of anonymity, said prices that have been steady in recent years will definitely increase next year. But if governments do not increase prices, companies—especially those that are more dependent on economy or value brands—will be forced to come up with ideas to cut costs in order to improve margins, the executive cited above added.

Still, as with many other sectors, it is too early to quantify the actual impact, according to some liquor firms. “Any big, drastic change in the tax structure takes time for people to understand what the actual implications could be. You know that only once you start operating in the new system,” said Shekhar Ramamurthy, managing director of India’s largest beer maker United Breweries Ltd.

India’s largest spirits firm Diageo Plc-run United Spirits Ltd declined to comment. But in its last quarterly results statement on 30 May, the company said it expected GST to impact margins.

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