How GST rolls into the Poultry Industry

Pashu Sandesh, 12th July 2017

Dr. Shirish Nigam

The government is rolling out the Goods and Service Tax (GST) which is said to be one of the reforms of its kind. Bringing a tax reform in a country like India is a tedious task in itself. Ofcourse, India is not the first country to implement GST. But no other country has such scale of the market and complicated tax systems have ever implemented it before. France was the first country to implement GST in 1954. As of now, there are almost 160 countries following the GST or dual GST model.

In India, since we have a federal system, dual GST is being implemented. In dual GST, the taxes are levied both by Central (CGST- Central Goods and Service Tax) and State (SGST- State Goods and Service Tax) governments. GST will remove the cascading effect on the taxes and thereby is said to lower down the prices. Without GST, the taxes are paid at the production site but with GST, the taxes will be paid at the consumption site. GST is going to make the tax system of the country more consumption driven than demand driven. And because of this very fact, it is said that few states which have a higher number of consumers will gain more out of GST than the one having a lower consumer base. 

To track down the difference in the prices that GST will bring, let's take a very easy example:

Assume Tax rate= 10 %

The above-mentioned example is of course not the true state as many factors are not considered to simplify the example, but the whole idea is to see that:

• Cascading effect of the taxes are nullified in GST. Without GST, we are paying taxes over taxes, whereas with GST, the taxes that are paid in the previous stage are deducted.
• GST is a value added tax. The tax is in proportion to value added to the product and not to the overall value.
• The cost that consumer pays will reduce drastically due to GST implementation.
• The supplier of the raw material will not be eligible for any tax credit since he has not purchased the items. Only those who have purchased certain goods and materials and have added value to the same are eligible for tax credit.

GST, where on one hand, is said to bring down the total cost that is paid as the tax. On the other hand, it is said the companies are not yet prepared for the same and therefore chances of hassle in the process are more likely. As per the reports, only 20% companies are getting ready for the new set of taxes. 

Everyone is eyeing the GST being proposed by the government. There is a state of chaos. People are sceptical about the effect it is going to bring in the business and the way they do business. For the poultry industry, things are going to change at two levels.

First is at the very level of prices of poultry items. The poultry industry has been traditionally out of the indirect tax ambit. With GST, although, the poultry feed and supplement industry are exempted, the overall prices are going to get affected. 

Indian market is a wet market. People prefer to buy live chicken from the shops- freshly cut in front of them. This segment is not going to get affected much as both before and after the roll of GST, the tax on the segment is 0%. Since this segment makes the major proportion of the market, it will act as a buffer to the price shock in other segments. 

For the Frozen chicken category, after rolling out of GST, the tax on both the segment is 12%, whereas traditionally, it was 5% for frozen raw and 14.5% for frozen processed. How it will affect the entire market and the meat market as such is not uniform throughout the country and will be very place specific. For example, in Bangalore, both frozen raw and frozen processed chicken have equal sales so there the market will not be much affected as compared to Hyderabad where the sales of processed chicken are far more. The demand and prices will shift based on the location and consumption habit of the consumers.

Egg consumption is also rising in the country. According to a consumer survey that EW Nutrition held last year, even the parents who are vegetarians are including eggs in their children's meals. Rolling out of GST might not affect Egg in shell market because it is exempted from GST but for the category of Bird's egg not in shell and egg yolks, the GST is 5%. This will not much affect the market as such as in India, as very few products from this category are consumed and it is mostly for export.

The second effect comes at the service Industry level. Restaurants are going to levy 28% taxes. Over the years, the number of people dining out has increased tremendously. The number of non-vegetarians has gone up. An interesting fact is, many people just have non- veg food outside their home, that is, at restaurants. Also, it has been seen that people who are non-vegetarians mostly order chicken at the restaurants. With the increase in taxes, it is speculated that the number of people going out for dining might take a dip. Over that, since poultry meat items are already expensive than the vegetarian menu, consumers might make a shift in ordering food. This will bring down the demand for the chicken and will affect the industry.

India might experience a behavioural shift in poultry meat and egg consumption for few initial days to survive the inertia of price hike in restaurants and market as such. Because of the higher services taxes, it is speculated that people will shift to make at home meat items. But over the period of time, things will fall in place and the market will again be smoothened out. 

Over and above, GST will affect the poultry industry but how long the effect will last is still questionable. What may go wrong in GST is people's perception towards the same. Sources say that it will reduce the hassle in the process of tax filing but people in the industry are still not sure of the process and therefore there is a state of chaos. Another problem that might arise is Missing Trader Problem. If I do not file a return, the person next to me in the tax chain will find it difficult to get the credit back. Indeed, GST is a giant step in itself torevamp the entire taxing system of such a large market and country. But with it, it also brings ambiguity about the process and in consumer's mind. Some say that prices will go down after GST implementation, others are of the opinion that inflation will hit in. Experts have mixed view about the same. So, at this moment, instead of making out a final view on the topic of GST and its effect on the market, let's just sit back to see ‘how it rolls'!

P.S.: Author is currently working as MD, EW Nutrition, and the views expressed are his personal.