Indians pay more for soaps, shampoos & toothpastes as HUL and P&G get ready for GST

MUMBAI: Indians are paying more for soaps, shampoos, or toothpastes, but the recent price hikes or altered output strategies may have less to do with input costs or demand than with the goods and services tax (GST) – the biggest change in the taxation landscape since Independence.
In the run-up to the implementation of the GST, expected on July 1, consumer goods companies such as Hindustan Unilever (HUL) and Procter & Gamble (P&G) are either changing their production strategies or raising prices to reflect the new tax treatment for their products. HUL, India’s biggest consumer company, has increased its production run in anticipation that GST would lower its tax burden, while P&G has taken an opposite view for its range of products, according to industry officials and distributors who did not want to be named. Prices were raised now to give companies the room to cut, and still cushion operating margins, once GST kicked in.

"HUL has taken the view that tax rates on some of its product categories may come down after GST. This would mean that the margins may go up, due to which HUL has increased its production," one of the people aware of the development, told ET. "P&G is, however, down-stocking its products with retailers, and has even reduced the manufacturing of some of its products."

Under GST, most retailing goods are expected to attract taxes anywhere between 18% and 28%. While HUL assumes that the rates could come down to around 18% from about 23% now, P&G has changed its production strategy on the assumption that tax rates would be 28%.

"Upstocking and down-stocking would mean there could be a blip in the GDP recorded after GST is rolled out. So, if things go according to what HUL has envisaged and the tax rates are lowered, HUL would reduce its production and first try to sell products manufactured before the GST date, on which old tax rates apply," a tax expert said.

For its part, HUL said it is premature to comment on the impact of GST now, pointing instead to what it described as steep increases in the cost of inputs — particularly vegetable oils, and raw materials linked to crude-oil. "Due to this, HUL has had to take calibrated price increases to offset some portion of the net input cost inflation, and the rest is managed through higher savings and better mix. In the short term, our production and sales plans are fine-tuned regularly to reflect market requirements," an HUL spokesperson said. P&G refused to provide its comments for this report.

During the last quarter, HUL removed discount offers as high as 15% from detergents, soaps and, shampoos, while Godrej Consumers raised the prices of the Godrej No1 and Cinthol soap-cakes by 11-13% year-on-year. India’s biggest oral-care company Colgate, which usually raises prices by 5-7% every year, increased them by 10-18% over last year.

On a separate email questionnaire about the changes in its manufacturing strategy in the run-up to GST, HUL said: "We have been preparing for migrating to GST for the past two years. Our supply chain strategies have always been done over the long term after factoring in the post-GST scenario. In the short term, our production and sales plans are fine-tuned regularly to reflect the market requirements."

DE-STOCKING EFFECT
Unlike the November demonetisation, after which the impact lasted for more than a quarter, the GST may have a de-stocking effect, but for a short duration, say experts. Also, analysts expect HUL to expand its operating margins because of GST, as fewer warehouses and other benefits would lower its cost base.

"There is a high probability that trade may start de-stocking inventory as the date of GST implementation draws closer, with a view to reducing the VAT-paid inventory in the system so that it does not have to take the credit from GST-paid goods as output," said Abneesh Roy, senior vice president at Edelweiss Financial Services that expects HUL to expand its operating margins.

"De-stocking could also happen due to non-clarity on GST rates." Hasmukh Adhia, revenue secretary, responding to an email query on product categorisation had told ET, that the government is using harmonised system of nomenclature (HSN) that provides for detailed scientific method of classification for goods, and which is set to remove definitional ambiguities and minimising classification/rate of tax related disputes.