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The government finally made the 0 percent duty for sanitary napkins. This is after a lot of requests, back and forth, this particular tax reduction. But the road to hell is apparently paved by the GST
There seems to be some confusion about sanitary napkins that are exempt, but the lack of input tax credit will cause them to increase the prices. This seems wrong in my opinion. I will try to explain. (Based on my "tweetstorm ")
Suppose I sell sanitary napkins at Rs 112.
This is Rs. 100 + Rs 12 GST
I have costs of entry of Rs. 70 + 12% GST = 70 + 8.4 = 79 (say).
I earn a gross profit = 112-79 = 33
I pay a net GST to the government of Rs 3 (I collected Rs 12, but I already paid Rs 9 on the entries )
My profit is Rs. 30.
The government decides to say that my product is exempt from the GST. Now what?
GST Free: But No Input Tax Compensation
If you think I'll evaluate my performance at Rs 100, you have to be crazy. Because I have entry costs of Rs 79 (remember?). It's Rs 70 cost plus Rs. 9 GST on it. I will not write the Rs. 9 because I do not collect the GST
If I sell at Rs 100, I will make profits of Rs 21. Earlier, my profit was Rs 30 – why would I make a profit less?
So the new logic, assuming I still want to make 30 Rs profit:
I will sell at cost (Rs 70 + 9 GST) plus profit (Rs 30) = 79 + 30 = Rs. 109
Prices have gone down! But not so much
My selling price, earlier, was Rs 112.
Now it's Rs. 109.
So there is a fall of Rs 3. This is not much. That's like saying that Rs 112, while we had 12% GST, is now Rs. 109 at 0% GST, and costs, profit margins, etc. are exactly the same.
It's not the same as saying, "Oh, my product is GST exempt now, and it was Rs 100 + 12 GST, so I should reduce it to Rs. 100 only "
The warning: duty reversed
And if I paid 18% on my entries, but I had to pay 12% on my production? C is a structure of right inverted.
Before starting the free GST:
> I charge Rs 100 + 12 GST = Rs. 112
> My cost = Rs. 70 + 18% SST = Rs 70 + 12.6 = Rs. 82.6
> I get Rs 12 TPS, but I paid Rs. 12.6 on inputs, so I pay nothing to the government. do not receive a refund either
> My Profit = 112-82.6 = Rs. 29.4
If the product becomes GST Free:
> My Entry Price = 82.6
> The profit I want (I had the habit of doing it ) = 29.4
> So, my selling price = 82.6 + 29.4 = 112
> The selling price does not change at all.
You will notice that the change in selling price depends on the profit I earn and my GST. But it is also true that it is almost impossible that I have to raise prices to keep the same profit
What Happens to Pads?
Sanitary napkins will not drop by 12%
] Because this is not how the GST is structured.
Inputs have GST. According to a government publication, it seems that there are inputs at 18% (absorbent polymer, glue) and some at 12% (paste, release paper). This might not represent a substantial part of the costs: there will be the costs of packaging, transportation, electricity, machinery, and so on. These have a GST that must be included in the product cost calculation.
However, there is one area that helps. If they sell their products to wholesalers, they then sell to retailers, who then sell it to you. At each of these stages, there is a GST that should have been paid, at 12%
Now, none of this should be paid because the product transferred has no GST.
the maths show you one thing: Prices of sanitary napkins can not go up. But they will not fall much either.
But Hey: It's getting cheaper to import
Let's say I make sanitary napkins in Sri Lanka. And export to India. The Sri Lankan government (or most others) typically refund taxes on an exporter's inputs.
So, it costs me Rs. 70 to make a sanitary napkin. No more.
I can export to India and sell to Rs. 100. India has the idea that if anything is taxed in India, the imported article will be subject to the same right, simply so that everything stays healthy.
Earlier, I would have to pay 12% GST and sell my product at Rs. 112.
Now I pay 0% GST (since the item is "zero-rated") and I can sell to 100.
Madness: Importing from you is actually more efficient
Think about it: the foreign government is paying back the entry fees so that I can still make the same margin here and sell at 9% lower (The price of the Indian manufacturer was Rs. 109, remember.)
It is so complex that even India is supposed to refund the GST from an exporter. Technically, it would be more efficient to put a ship outside Mumbai, send sanitary napkins to this ship (as an export) and reimport it immediately without paying any fees.
It's a way to sell at Rs. 100 and keep your margins.
And the price goes down too, so everyone is happy.
So, what will happen?
Well, we will only have cheaper imports. And if you are planning to create a factory to manufacture sanitary napkins for India, think about Sri Lanka.
If we completely ban imports, then you will see a slight drop in price, not much more.
Source: Capitalmind
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