Why is everyone clearing the stock before GST? | srei
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Why is everyone clearing the stock before GST?

The MRP of most of the products like clothing and many other articles is governed by the Legal Metrology Act, 2009. Under this act,

  • MRP is the price you charge for the product inclusive of taxes. Once the product is removed from the factory, the MRP cannot be changed.
  • MRP of all your products should be justified considering your cost as well as your profit margins.
  • Any change in MRP needs to be first approved by a body formed under this act.
  • To get the approval of the change in MRP a number of procedures and a detailed explanation along with the financial analysis is required to be given.

So considering the same the companies have 2 options:-

  • Get approved the change in MRP.
  • Sell the product at the same price(inclusive of taxes).

Now, The companies prefer not to select the first option due to its various complexities.

So evaluating the second option,

If they don’t clear their stock before implementation of GST, they will have to charge GST on the same MRP. To make it clear consider this example.

  Pre-GST Post-GST
MRP (Inclusive of Taxes) 100 100
Tax Component (12.5% VAT and 28% GST) 11.11 21.875
Actual Selling Price 88.99 78.125

If you notice, there is a direct impact on the profit by Rs. 10.865 as the increase in rate of tax has become their cost.

Therefore, all companies are trying to sell their stock before GST so that the increase in rate of tax does not affect their profit too much. As a result, they are giving discounts and trying to clear their stocks.

The blog post is authored by Mr. K.R. Muthuraman, Sr. VP – Treasury, Srei Infrastructure Finance Limited.