The three factors are 1) public knowledge and education, 2) distribution and accessibility of products, and 3) pricing strategies.
This is according to Santosh Dalvi, partner, Indirect Tax, KPMG in India, in response to queries from NutraIngredients on the extent to which GST reduction could boost consumption.
The Indian government earlier announced a slew of GST cuts as part of Next-Gen GST reforms. The reduction cuts across food to pharmaceuticals, to nutraceuticals, and traditional Indian medicines like Ayurveda, Unani, and homeopathy.
The reduced rates came into effect since yesterday (Sep 22).
Nutraceuticals, including multivitamins and protein powder, now have its GST slashed from 18% from 5%. There are two components to the 5% GST tax - with 2.5% from central GST and 2.5% from state GST.
FMCG giant Dabur, for example, has announced that its products, such as its flagship 900g Dabur Chyawanprakash ayurvedic formula taken for supporting the immune system, will have its maximum retail price (MRP) reduced from INR475 (US$5.38) to INR440 (US$4.98).
Protein powder brand Only What’s Needed (OWN) by popular Indian influencer Revant Himatsingka also announced that the price of its 1kg protein powder is down from INR2799 (US$31.68) to INR2491 (US$28.20).
The move was generally well-received by the industry, as tax cut is believed to stimulate consumption.
Nutraceuticals, being increasingly viewed as essential rather than optional in India, will stand to benefit as well.
“With rising awareness around preventive healthcare and wellness, the consumption of nutraceutical products has witnessed significant growth-both in India and globally. These products are increasingly being viewed as essential rather than optional.
“The recent GST rate reduction on nutraceutical products from 18% or 12% to 5% is a timely and impactful move as it makes nutraceuticals more affordable and accessible,” said Dalvi.
“Lower tax incidence enables companies to expand market reach, scale operations, and accelerate business growth, especially in underserved regions,” he added.
Completing the equation
However, Dalvi pointed out that tax cut was only part of the equation when it comes to influencing consumer behaviour.
Companies would still need to take note of critical factors like accessibility of their products to better leverage on tax cuts.
“While tax cuts are a powerful lever, they are only one part of a broader ecosystem that drives consumer behavior.
“There are other critical factors as well which lead to stimulate consumption like public knowledge and education about the products’ benefits, distribution and accessibility of products in urban as well as rural areas.
“In essence, GST reduction can stimulate demand, but its full impact is realized only when combined with effective outreach, education, and pricing strategies,” he said.
Consumption boosting efforts elsewhere
India is not the only country that has revised its tax rates in recent months to boost consumption, Dalvi pointed out.
From January 1 this year, several European countries like Spain, Slovakia, and Cyprus also implemented reduced Value-Added Tax (VAT) rates on consumer products, including certain nutraceuticals.
In Slovakia, for instance, the standard VAT rate of 23% is reduced to 5% for basic necessities such as staple food, medicines, medical products, and selected health-supporting goods.
Some countries like Japan, on the other hand, have introduced other methods to drive consumption.
For instance, the Foods with Function Claims (FFC) system was introduced a decade ago as part of “Abenomics” - then prime minister Shinzo Abe’s efforts in revitalizing the economy.
The FFC system allows fortified foods and beverages to make functional claims.
Inverted duty structure
Dalvi also pointed out that the 5% reduced GST rate largely applies to finished nutraceutical products, with raw materials and input services mostly remained at a tax rate of 18%.
He said that this could create an inverted duty structure, which may lead to accumulation of input tax credit (ITC) and potential strain on working capital for manufacturers.
Nonetheless, the government has announced plans to help ease liquidity challenges.
“The 56th GST Council meeting clarified that refunds due to inverted duty structure arising from GST rate changes will be applicable only for goods manufactured after the rate revision.
“Additionally, the government announced plans to introduce a provision for sanctioning 90% provisional refunds of ITC to ease liquidity challenges,” he said.
