February 22, 2016

Have you priced your product/service above cost

The Goods and Services Tax will have far-reaching consequences for the businesses and traders. The industry and the corporate world is looking forward to the passage of the GST bill in the Parliament and its subsequent implementation. Most of the people expect the taxation reform to simplify the indirect taxation and rationalize the tax structure. Most of the countries that have implemented GST have benefited from it. However, there is a requirement of understanding the implications as well as preparing for the transition to the new system. This will also ensure that there are minimum disruptions to the business when the GST gets implemented.

The impact of GST on prices: One of the important aspects of the GST would be the pricing of the products and services. Each sector and industry would be separately impacted as per the provisions contained in the bill. The areas that have to be taken care of are the long term pricing strategy and your advertising strategy. As a consequence, you will have to evaluate the market positioning you hope to achieve. The GST council or the governing body is likely to keep a strict check on the pricing/service above cost. Any misleading or deceptive conduct and price exploitation during the transition to GST is likely to be dealt with a strict hand.

The price checks: Though it is too early to state it, the guidelines that have been followed in other countries require that the displayed prices are inclusive of GST. This will particularly hold good for the retail sales. The checkpoints would be on the way your business displays its prices and the campaigns you undertake to encourage customers to buy your products. The difference between the advertised price and displayed price on the product will not be tolerated. The statements that prices are likely to go up post GST or increasing the prices before the GST implementation, in anticipation of increase post GST, will not be allowed.

The pricing formula: The cut-off date would be announced by the governing body and the supply price before the date would be taken as a reference. The amount and timing of your price adjustments would be looked at with a view to determining whether a price increase is unreasonably high. It would be expected from the business houses to immediately pass on the full effect of the cost reductions to the customer in case the GST results in a lower tax. However, if there is an increase in price due to the GST implementation, the increase must take into account the full offset due to the input tax credit. A mark-up price due the GST component will not be permitted. The prices have to reflect the actual and not anticipated tax increases.

Price coverage: Additional compliance costs for GST can be covered by increasing your margins. However, the capital costs spent on the GST infrastructure would have to be amortised. Any additional price increase would have to be justified with respect to the business environment that you operate in. The governing body is going to keep a strict check on the price increase due to GST and not allow for any price exploitation on this front.