Post Tax Rate Cut FMCG Firms Set to Reduce Prices

Post Tax Rate Cut FMCG Firms Set to Reduce Prices

Prices of shampoos, chocolates, nutrition drinks and condensed milk are set to drop 5-15% after the GST Council eased them out of higher tax slabs. Companies such as Hindustan Unilever, Dabur, Amul, GlaxoSmithKline, Procter & Gamble, Nestle and Perfetti Van Melle said they have either decided to reduce prices or are planning to do so after the GST Council cut tax on several consumer goods to 18% from 28%. They, in fact, are also bound by the anti-profiteering clause under the GST law to pass on any benefit from lower tax incidence to consumers.

“We will drop prices at least by 5% on our shampoo range,” Dabur chief executive Sunil Duggal said. The country’s largest dairy firm, Amul, said it would slash prices of condensed milk and chocolates by 5-10% with immediate effect, while GlaxoSmithKline Consumer said it would cut the price of popular chocolate drink Horlicks in line with the new rate.

Hindustan Unilever said it was calibrating the exact price reduction. The company had said last month that it would immediately pass on any tax benefits to consumers. With many of its segments now under 18% tax bracket, compared with 28% previously, analysts expect the maker of Dove soap and Rin detergent to cut the prices of its skin creams and increase grammage of laundry brands by as early as next week.

However, the companies may face impediments while passing on benefits to consumers, as some retailers have threatened they would not slash prices unless producers protected their margins and took back old stock before they implemented price cuts, said industry executives.

Negotiations between the FMCG majors and the retailers have already begun and will take at least a week to reach a conclusion, they said. Tax experts said the companies must settle these issues at the earliest as the law makes it compulsory for them to pass on the benefits.Deloitte India partner MS Mani said manufacturers would need to strategise on passing on the GST reduction, depending on the extent of the stock with each intermediary in the supply chain and other factors.

Companies Working on Solution

“In the absence of a clear methodology prescribed in the law for ascertaining the extent of the benefit that needs to be passed on, each business may need to separately assess the same,” he said

"Most companies will now be cautious of anti-profiteering provisions and are likely to reduce the prices. For the stock in the market, reduction may take some time,” said Pratik Jain, national leader, indirect tax, PwC India.Companies, too, acknowledged this as a hurdle to lower prices, and said they were working on the solutions

A Nestle India spokesperson said the company would pass on the tax benefit to consumers, but “there will be a transition time before new price stocks are available in the market”.

SK Tijarawala, a spokesperson for Patanjali, said the Ayurveda products maker has already started the process to reduce prices, but there were multiple channels and processes to be undertaken before the new prices reach consumers. “We are working on the plans,” he said.

“Technically, the retailers have an option to either reduce the price right away or a bit later. However, since the law states that no one can profit from GST, the entire profit made from the date of reduction would eventually need to be passed on to customers,” said PwC India’s Jain.

Sushil Kumar Bajpai, president at RSPL that sells ‘Ghari’, India’s largest detergent brand, said it would offer “some kind of promotion” to ensure that the benefit of lower tax reached the consumer. “We will mostly increase grammage in new products which will indirectly reflect price cut of about 10% on an average. For the existing stock already in the market, we could offer some kind of promotion,” he said.

The Economic Times, New Delhi, 13 th November 2017