Indians are paying more for soaps, shampoos, or toothpastes, but the recent price hikes or altered output strategies may have less to do with input costs or demand than with the goods and services tax (GST) – the biggest change in the taxation landscape since Independence.
In the run-up to the implementation of the GST, expected on July 1, consumer goods companies such as Hindustan UnileverBSE -0.40 % (HUL) and Procter & Gamble (P&G) are either changing their production strategies or raising prices to reflect the new tax treatment for their products. HULBSE -0.40 %, India’s biggest consumer company, has increased its production run in anticipation that GST would lower its tax burden, while P&G has taken an opposite view for its range of products, according to industry officials and distributors who did not want to be named. Prices were raised now to give companies the room to cut, and still cushion operating margins, once GST kicked in.
“HUL has taken the view that tax rates on some of its product categories may come down after GST. This would mean that the margins may go up, due to which HUL has increased its production,” one of the people aware of the development, told ET. “P&G is, however, down-stocking its products with retailers, and has even reduced the manufacturing of some of its products.”
Under GST, most retailing goods are expected to attract taxes anywhere between 18% and 28%. While HUL assumes that the rates could come down to around 18% from about 23% now, P&G has changed its production strategy on the assumption that tax rates would be 28%.
“Upstocking and down-stocking would mean there could be a blip in the GDP recorded after GST is rolled out. So, if things go according to what HUL has envisaged and the tax rates are lowered, HUL would reduce its production and first try to sell products manufactured before the GST date, on which old tax rates apply,” a tax expert said.
The Economic Times, 10 April 2017