The unintended consequences of making sanitary pads 0% GST

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Clearing the confusion about sanitary pads going exempt but lack of input tax credit will make manufacturing raise prices.

The government finally made 0 percent duty for sanitary pads. This is after much demand, back and forth, of this particular tax cut. But the road to hell is paved by GST, apparently.

There seems to be some confusion about sanitary pads going exempt but lack of input tax credit will make them raise prices. That seems incorrect according to me. I’ll try to explain.

Assume I sell sanitary pads at Rs 112.

This is Rs. 100 + Rs 12 GST.

I have input costs of Rs. 70+12 percent GST = 70+8.4 = 79 (say).

I earn a gross profit = 112–79=33.

I pay a net GST to govt of Rs 3 (I collected Rs 12, but I’ve already paid Rs 9 on inputs)

My profit is Rs. 30.

The government decides to say my product is GST exempt. Now what?

GST Free: But No Input Tax Offset

If you think I’ll price my output at Rs 100 you would have to be crazy. Because I have input costs of Rs 79 (remember?). That’s Rs 70 cost plus Rs. 9 GST on it. I don’t get to write off the Rs. 9 because I don’t collect GST.

If I sell at Rs 100, I will make Rs 21 profit. Earlier my profit was Rs 30 — why would I make a lesser profit?

So, the new logic, assuming I still want to make Rs 30 profit:

I will sell at cost (Rs 70+9 GST) plus profit (Rs 30) = 79+30=Rs. 109.

Prices Fell! But Not So Much

My selling price, earlier, was Rs 112.

Now, it is Rs. 109.

So there’s a Rs 3 fall. This is not much. It’s like saying what was Rs 112 when we had 12 percent GST is now Rs. 109 at 0 percent GST, and the costs, profit margins etc. are exactly the same. 

This is not the same as saying “Oh, my product is GST exempt now, and it was Rs 100+12 GST, so I should cut it down to Rs. 100 only”

The Caveat: Inverted Duty

What if I pay 18 percent on my inputs, but had to charge 12 percent on my output? This is an inverted duty structure.

Before going GST free:

 I charge Rs 100 + 12 GST = Rs. 112
> My cost = Rs. 70+18 percent SST = Rs 70+12.6 = Rs. 82.6
I get Rs. 12 GST, but I’ve paid Rs. 12.6 on inputs, so I don’t pay the government anything. And don’t get a refund either
My profit = 112–82.6 = Rs. 29.4

If the product becomes GST Free:

 > My input price = 82.6
 > The profit I want (I used to make this) = 29.4
 > So my selling price = 82.6+29.4 = 112
 > The selling price doesn’t change at all.

You’ll notice that the selling price change depends on the profit I make and my input GST. But it is also true that it’s almost never likely to be that I have to raise prices very much — to keep the same profit.

What Happens to Pads?

Sanitary pads won’t go down 12%.

Because that’s not how GST is structured.

The inputs have GST. From a government release, it appears that there are inputs at 18 percent (absorbent polymer, glue) and some at 12 percent (pulp, release paper). These might not add up to a substantial part of the cost: there will be packaging costs, transportation, electricity, machinery and so on. These have GST on them which has to be included in the costing of the product.

However, there’s one area which helps. If they sell their products to wholesalers, who then sell onward to retailers, who then sell it to you. At each of these stages, there’s a GST that would have had to be paid, at 12%.

Now, none of that needs to be paid on the transfer because the product being transferred has no GST.

Regardless, the math shows you one thing: The prices of sanitary pads may not go up. But they won’t fall much either.

But Hey: It Becomes Cheaper To Import

Let’s say I make sanitary pads in Sri Lanka. And export to India. The Sri Lankan (or most others) government typically refunds the input taxes of an exporter.

So it costs me Rs. 70 to manufacture a sanitary pad. No more.

I can export to India and sell at Rs. 100. India has the concept that if something’s charged GST in India, the imported item will be charged the same duty, just to keep things sane.

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 at 100.

The Madness: Importing From Yourself is Actually More Efficient

Think of it: the foreign government refunds input duties so I can still make the same margin here and sell at 9% lower (Indian manufacturer’s price was Rs. 109, remember).

It’s so complex that even India is supposed to refund the GST of an exporter. Technically, it would be most efficient to put a ship outside Mumbai, send sanitary pads to that ship (as an export) and immediately reimport it back paying no duty.

This is one way you can sell at Rs. 100 and maintain your margins.

And the price also falls, so everyone’s happy.

So What’s Going To Happen?

Well, we’ll just get cheaper imports. And if you’re considering setting up a factory to make Sanitary pads for India, consider Sri Lanka.

If we banned imports altogether, then you’ll see a minor drop in the price, not much more.

Source : https://www.moneycontrol.com/news/business/the-unintended-consequences-of-making-sanitary-pads-0-gst-2751621.html

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