Source: The Economic Times, June 08, 2017
MUMBAI: If you buy a soap or a bottle of shampoo this month, chances are it will weigh less than what it did about a month ago.
The difference in weight could be there because of fast-moving consumer goods (FMCG) companies, fearing penalties in case their profits go up after the goods and services tax (GST) comes into force, are adopting innovative price/value strategies to insulate themselves. Under anti-profiteering rules of GST, any company or vendor whose profits jump due to the new tax regime must pass on the benefits to consumers.
So, companies are adopting this temporary measure and would bring the prices back to where they were after GST.
Many FMCG companies, which think their profits might surge due to changes in taxation and new credit mechanisms under GST, are trying to prop up profits now so that after July 1 they can claim that the jump is not due to new taxation.
Contract manufacturers of FMCG companies, company insiders, tax experts and government officials say FMCG companies are adopting two-three strategies to protect themselves against anti-profiteering laws.
One is reducing weight of the products. In this case, a company might change the weight of a shampoo bottle from 180 gram to 175 gram, though its maximum retail price will remain unchanged.
Companies are at liberty to launch new products and pass them as new pack sizes. But the idea is to show a higher profit in the month preceding the introduction of GST.
In the second method, some companies are asking their contract manufacturers to increase their price to company, citing jump in input costs.
“Companies have been asking their vendors to increase the prices so that they can pass it on to customers,” a person with direct knowledge of the matter said, adding, “The companies would then, claim the price increase by their vendors is due to inflation or rise in material costs.”
The third way the companies are going about this is by tweaking formulas of their products.
“Vendors have been asked to dilute some of the products, such as shampoos and body wash,” another person in the know said, adding that changing product composition is also aimed at reducing the cost.
Most of the companies, including HUL, P&G and Marico, have increased their prices across most categories in the past couple of months or are looking to do so this month. These companies, however, attribute the price rise to inflation and an increase in input costs.
A revenue official based in Mumbai said that changes in product sizes and the composition also pose a problem for the government.
“If there is a jump in profits from a product (after GST), the company can say it’s not an apple-to-apple comparison because the size and composition of the product is different,” he said.
The key objective in all the strategies adopted by FMCG companies is to increase the profits in June. This is mainly because if the profits jump after July, it cannot be attributed to GST.
Industry trackers say it would be anyway tough for the government to go about with anti-profiteering.
Also, experts say about 80% of industries in India do not indulge in cartelisation, and therefore the competition will ensure they pass on the benefits to consumers. Companies also fear that any increase in profits due to reasons other than GST may also be construed as anti-profiteering, say experts.
“The anti-profiteering legislation has been drafted in a very wide manner, which may give rise to misinterpretations and disputes with businesses. Any change in prices or profitability may not be due to tax rate reduction or increase in input-tax credits, and there are several other factors which could potentially be misread by tax authorities,” said MS Mani, senior director, Deloitte Haskins & Sells.