Prices on the upswing as VAT kicks in

12.5% VAT on automobiles forcing dealers to cut discounts; pharmacists raise prices.

A week after 19 states switched to the value-added tax (VAT) on April 1, there were indications of prices hardening in some of these markets.

In the run-up to the VAT regime, the government had consistently claimed that the switch over from sales tax to the VAT would not lead to any rise in prices.

In Delhi, for instance, a 12.5 per cent VAT on automobiles has replaced the earlier sales tax of 12 per cent. Several car dealers told Business Standard this would cause them to cut the discounts they were offering.

Prices of used cars are also expected to harden in the city as a 4 per cent VAT has been introduced in place of a flat sales tax of Rs 750. Some dealers were also apprehensive that this might shift the used car market to the unorganised sector.

Although the prices of consumer durables remained largely unchanged in Delhi as most dealers were liquidating stock purchased before April 1, prices are expected to rise once fresh stock comes into the market. Market leader LG has increased prices for all product categories by nearly 2 per cent uniformly across the country.

"The new prices may not have been implemented uniformly by all retailers as sales were weak in the last two months and retailers are trying to push products at a discount," said CM Singh, head (colour televisions), LG India.

Pharmacists who have picked up new stock after April 1 have raised prices of syringes, cotton and the like as the 8 per cent sales tax has been replaced with a VAT of 12.5 per cent. The new stocks of medicine, however, are expected to be cheaper by 2-3 per cent in Delhi as well as Mumbai.

In the market for FMCG products, there is still no clarity. But there are indications that some companies might raise their prices.

In a presentation to financial analysts on April 1, Nestle India indicated that prices could harden. "The VAT will also tax a larger part of the value chain than hitherto and at higher tax rates," it said.

But Dabur India has decided against hiking prices. "At an overall level, there is no impact, though the tax on some products has gone down and on some products has gone up. So the company has decided against raising prices," a company executive said.

Still others feet that the VAT has been introduced at a time when input costs, especially steel, are going up sharply.

"Prices of electrical products could go up soon but that will be because of the hike in steel prices. The impact of the VAT on prices will be 0.5-1 per cent, depending on what was the sales tax in the state," said Havell's India director Anil Gupta.