In GST regime, product prices may be impacted due to change in tax rates, free flow of credits, cash flow, tax treatment of sales promotion schemes and discounts etc.
In the earlier articles, we had discussed that GST is an inevitable change which is likely to impact the various facets of business such as Finance, IT, Supply Chain, HR, Marketing, etc. One of the most critical aspects of business likely to be impacted under GST is Product pricing.
Today taxes constitute a substantial part of the total product/ service cost. While in general Central Excise duty and VAT together could contribute 20 per cent or more of the final price to the customer, in some high taxed goods it could be as high as 35 - 40 per cent. Any change in the tax structure would therefore impact product prices. In the highly competitive world of today, with information on competitors’ market prices available easily, this impact assumes large proportions. Let us therefore try to understand how GST could broadly affect prices.
In GST regime, product prices may be impacted due to change in tax rates, free flow of credits, cash flow, tax treatment of sales promotion schemes and discounts etc. These would have positive or negative impact on each stakeholder in the supply chain -manufacturer/ service provider, dealer or end consumer. For instance, a manufacturer may benefit due to the free flow of credits on inter- state procurements which today suffer non creditable CST, and also due to the reduced tax outflow on local procurements (12.5% excise + 12.5% VAT vs 18% GST). A dealer or an intermediary would now be charging a higher rate in the invoice (say 18% GST) as against lower VAT rate of 12.5% today; of course the base price in such cases may now see a reduction. Credit of taxes on services could be available to this intermediary which is generally not available today.
A detailed impact assessment would help companies to ascertain the net impact on product pricing as a result of savings/increase in costs. They can therefore decide the right pricing strategy. Companies dealing in B2C segment will be significantly affected because of this price impact and will have to trace the complete distribution chain and identify the impact on each player. Even for the B2B segment, say an auto component manufacturer, such an analysis would help in negotiating price with customers. They will also have to insist on price studies by their vendors and then negotiate with them. GST could definitely impact prices of goods at every link in the supply chain. However the opportunity to negotiate prices will be available only once before GST is rolled out. Therefore it is necessary to do a careful pricing analysis and follow that up with the right negotiation strategy with the customer as well as vendors. This is true even for service providers, IT / ITES units and traders besides manufacturers.
Businesses often try to live by the maxim that “The moment you make a mistake in pricing, you are eating into your reputation or your profits .” Deciding the right pricing strategy before the GST roll out could help companies achieve this by increasing their market share or improving their bottom line.
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