Consumer goods companies have told officials of Central Board of Indirect Taxes and Customs (CBIC) that they cannot cut retail prices of low-value products in line with GST reductions, arguing that further price cuts would make transactions inconvenient for consumers, three people aware of the matter told Moneycontrol. Instead, they have offered to increase the pack size.
Makers of biscuits, soaps, and toothpaste sold at Rs 5, Rs 10 and Rs 20 say lowering MRPs below these price points would not work in the Indian market. For instance, biscuits which were earlier sold at Rs 20, included the value of 18 percent GST. Post September 22, the GST on biscuits will reduce to 5 percent, which would subsequently lower the MRP to Rs 17.80 or Rs 18.
"Rs 18 is not a price which we want to have for the daily-use items. The Indian consumer is used to demanding products of the price band – Rs 5, Rs 10, and Rs 20. We don’t want to disturb this structure," a senior executive of an FMCG company told Moneycontrol, on condition of anonymity. "What we can do, is increase the volume of the packaged item proportionally, while keeping the price the same. Meaning, the size of the Rs 20 pack of a biscuit would increase," another company executive said.
Rishabh Jain, CFO, Bikaji Foods international told Moneycontrol that post the new rates, the company will do "grammage increase" in "impulse packs" to pass on the GST benefits fully to the consumers. An impulse pack in FMCG is typically a product with packaging designed to trigger a spontaneous and unplanned purchase.
Officials in the Finance Ministry say the government is considering issuing guidelines for such products in the coming days to ensure that there is no "unintentional-profiteering" by FMCG companies.
On Thursday, Dabur India Chief Executive Officer Mohit Malhotra told Moneycontrol that companies would definitely pass on the GST rate cut benefits to consumers as that will lead to an uptick in consumption.
The 56th GST Council last week approved the overhaul of the indirect tax system by modifying the regime into a "simple tax" with a standard rate of 18 percent and a merit rate of 5 percent. A special de-merit rate of 40 percent will be levied for a select few goods and services. Most daily use items are now in the 5 percent slab.
At present, there is no formal mechanism in place to check profiteering by companies, but official sources say that the government is open to the idea of introducing one, if it feels companies are not passing on rate cut benefits to consumers.
Namit Purit, Managing Director & Senior Partner, BCG feels that overall, price movements will be modest, with FMCG companies more likely to adjust pack sizes at popular price points rather than sharply cut or raise sticker prices. "We expect Rs 5/10 price points to have significant value (grams) provided to consumer," he added.
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