GST on MRP – Included or not Included?
Goods and Services Tax (GST) is an indirect form of tax collection employed in India on the supply of goods and services. Being a multileg tax, GST is promulgated at each stage in the exercise of production, but it is intended to be recouped to all the individuals in the several junctures of production apart from the final consumer and as a destination-based tax, it is collected from the stage of consumption and not stage of inception like prior taxes. GST was established to circumvent cascading of taxes.
The breakup of distinct tax slabs for aggregation of tax under GST are as follows: 0%, 5%, 12%, 18%, 28%. However, alcoholic drinks, electricity, and petroleum products are kept out of the purview of GST and are charged independently by each state government.
Ultimately, the idea of the ‘One Nation, One Tax’ scheme turned true when the highly-awaited tax came into force on 1st July 2017. Consequently, the entire tax layout on the provision of goods and services got revamped. All indirect taxes collaborated to become one tax, known as GST at present. But there are still many manufacturers and traders who are quite unconvinced regarding the calculation of GST on MRP products. Sellers are very much in a confused mind state whether or not to tax GST on MRP commodities.
Therefore, it is critical to appreciate the essence of MRP and how GST pertains to several products. This particular article aims to enlighten the readers with each aspect of MRP to eliminate confusion. So, let’s first begin with MRP.
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What is MRP?
Whenever we go for shopping packaged commodities these days, after having a glimpse of the product and even remotely considering buying it, our gaze spontaneously falls on its Maximum Retail Price (MRP). Two good reasons sum up the entire thing.
First of all, it apprises us of the sum we will have to disburse out so that we can shop accordingly. Furthermore, it is the superior signaling medium, in a manner that it distinctly indicates the expected, assigned price of the commodity and how it is in contrast with other homogenous commodities available in the market which assists us in making a decision.
Maximum Retail Price (MRP) is the highest reckoned amount that can be levied by the makers of any product which is to be sold in India. However, manufacturers do have an option of selling products at a price less than the MRP in a case where attracting more customers to their stores is important. As per the Consumer Goods Act, 2006, the retailer/ seller cannot impose any other charges over MRP as printed on the packaging of the commodities. This means GST is already included in MRP.
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Why MRP is needed?
The idea of mandatorily printing and making it available at one’s disposal a Maximum Retail Price on all packaged commodities was initiated in 1990. It is to be printed on the packaging only by the manufacturer or the original importer of the commodity.
Mandatory MRP printing was established to put a stop to tax dodging. Earlier, manufacturers used to print a Maximum Retail Price with Local Taxes Extra. But this method was being taken undue advantage of by many retailers in a way that they collected exorbitantly more in the name of ‘local taxes’ than what was stipulated.
Hence, the idea of MRP was born. Today, MRP comprises raw material cost, manufacturing expenses, franchise margin, retailer margin, manufacturer’s margin, cost and freight, miscellaneous charges, and so on. GST is the most recent one to be included. In essence, a standard set as MRP is also a certitude for the price of a product, very similar to quality assurance.
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Why MRP might not be required?
There are various reasons as to why India has to do away with the current system of MRP which we stick to and embrace more modern product pricing techniques-
- Having a Maximum Retail Price for all retail products necessarily gives rise to criminality in case of non-adherence, unlike other equivalent techniques used across the world. This in turn results in mammoth enforcement costs, increases the costs of running a business, and escalates the cost of products overall.
- MRP is relevant only for packaged products and not for daily essentials like fruits, vegetables, pulses, etc, a field that is engaging an ever-growing share of India’s economic output. Vegetables, rice, pulses are mostly unbranded and sold loose. The retailer thus has the liberty to choose the price, established on his costs and the demand and supply for those commodities.
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- Even the branded, packaged commodities are not generally sold at their MRP. It is not uncommon to pay a price much higher than the MRP in movie theatres, expensive restaurants, tourist hotspots, airports, and railway stations since shops located in these places charge a price above MRP for the ‘services’ they provide along with the product. They span from the costs of making that product accessible at that specific area to the implied charges for cooling charged on packaged drinks, and beverages, for example.
- Another ridiculous characteristic of MRP’s is how producers usually print an MRP so absurdly higher than what the actual cost of production is so that the product can be sold up to a discount of 90 percent. The most obvious examples are firecrackers and automobile spare parts.
- In the pre-GST days, it was quite evident that India is a confederation of states and states have the authority of charging their discrete rates of specific taxes, manufacturers used to take into consideration the highest tax rate which was charged on the product by any state in India and then extrapolated it for all other states. Thus, even if the tax rates in one specific state used to be cheap, we had to pay a higher price because the tax rates in other states were absurdly high.
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- Having a legally enforceable, fixed MRP scheme reduces the availability of goods in rural India and leaves our rural markets underdeveloped. Retailers in remote locations and villages frequently have to endure high transportation and storage costs, which cannot be transferred to the consumers since they are not legally allowed to charge a price higher than the MRP. Hence, they decided not to stock many commodities in the interest of circumventing sustaining losses. This, in turn, reduces the choice available to consumers.
After the introduction of GST, the effective prices of various products and items got replaced from their earlier value to new ones. Further, the Government also revamped the MRP rules for the manufacturers and retailers besides GST rates.
Tax rates have been reduced from 18% to 12% on items like condensed milk, diabetic food, refined sugar, medical oxygen, etc, and also from 12% to 5% by the government on various items. Some of the items on which GST rates have dropped from 28% to 18% are washing powder, detergents, custard powder, chocolate, wristwatches, goggles, blades, razors, watches, etc.
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MRP Rules after changes in GST rate and its enforcement:
Whenever there is a change in GST rate, the MRP on the entire finished product that is lying in the premises as closing stock at the end of the day is required to be amended as on the day of imposition or change in the rates. In such situations, the manufacturers/ retailers are required to print the updated MRP either by way of online printing, or stamping, or stickers. The following norms are necessary to be satisfied:
- The original MRP should come into sight distinctly on the items. Further, the updated MRP must not be in a way that hides the original one.
- People who wish to revamp the MRP need to publish 2 ads in 1 or more newspapers, one being a vernacular language, that is a language spoken in the city/ town/ state where he/she resides. Additionally, the same should be communicated to the Director of Legal Metrology and Controllers of Legal Metrology in the states.
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- In case there is a dip in the GST rate after its enforcement, then there is no requirement of advertising it in the newspaper.
- Under both situations, the manufacturer is obliged to paste a sticker of the updated MRP along with the old one.
- As per Section 140(3) provision of CGST Act, 2017, the deviation between original and updated MRP should not surpass the net price increase given the excess availability of ITC (Input Tax Credit) and keeping in mind the tax incidence.
Also, it has been made clear that when an invoice is issued to a customer, the MRP mentioned in the invoice should not reflect GST as a separate calculation. Instead, there is an option of showing the split-up of tax collection and sale price while payment of taxes to the government.
Whether MRP will increase or decrease after GST:
GST is an indirect tax system that has different slab rates for each category of goods/services. MRP includes the base price + GST. As and when there is a change in the tax rate, the MRP of the product also changes either by an increase or decrease in price.
Another factor that affects the MRP under GST is the availability of Input Tax Credit. In some cases of the Act, Input Tax Credit is not available under GST (blocked credit), which means the MRP of such commodities will increase. On the other hand, MRP of other commodities, for example, FMCG products has decreased due to a decrease in the tax rate.
Valuation of GST on MRP products:
Queries raised on the MRP of merchandise under GST have been clarified time and again by the Secretary of the Department of Consumer Affairs – Avinash K. Srivastava. It has been clarified that every manufacturer and distributor is under obligation to print the complete details of the updated as well as original MRP on the product. Additionally, it has also been said that if there is a soar in price, then another notification will be sent out, apart from the above requirement.
Further, the dealers registered under the Composition Scheme (a basic scheme for small taxpayers to obviate tedious formalities and pay GST at a specified rate of turnover.) are exempted from disclosing tax, whereas the other registered dealers other than those registered under the Composition Scheme should necessarily show the expense split up.
Since commodities do not attract any cess, but vehicles going to suburbs will keep getting charged, except if they have a national license. Check posts have been evicted by 22 states to date. The expense on vehicles is on the convergence border and not on the commodities being transferred. As a result, that should be paid. For evaluating the state of pricing and supply of merchandise, a Central Monitoring Committee was set up after GST came into force.
GST is in fact, charged on the agreement value which is the actual price paid for the supply of products and/or services. Hence, the value of supply under GST encompasses fees, duties, cess, and any other charges imposed under any act.
The formula for calculation of MRP is as follows:
Maximum Retail Price= Manufacturing cost + Packaging/ Presentation cost + Profit Margin + CnF Margin + GST + Dealer Margin + Retailer Margin + GST + Transportation + Marketing/ Advertisement expenses + Other Expenses.
Example of MRP Calculation:
Assume, a company is engaged in producing a product or service charging Rs.500/- per piece. Then, the computation for the same will be as follows:
- Manufacturing cost = Rs.500/-
- Packaging cost = Rs.10/-
- Margin = 40% = Rs.40/-
- Total cost = Rs.500 +10 + 40 = Rs.550/-
- GST = Rs.10/-
- CnF Margin = 7% = Rs.20.08/-
- Dealer’s Margin = 12% = Rs.58.21/-
- Retailer’s Margin = 25% = Rs.30/-
- Transportation Cost = Rs.40/-
- Marketing/ Advertisement Expenses = Rs.25/-
- Other Expenses = Rs. 15/-
Consequently, Maximum Retail Price (MRP) = Rs.500 + Rs.10 + Rs.40 + Rs.10 + Rs.20.08 + Rs.58.21 + Rs.30 + Rs.40 +Rs.25 + Rs.15 = Rs.748.29. Therefore, the product cannot be sold at a price higher than Rs.748.29.
Objections in case of merchant levying a price higher than MRP on items:
According to the directions of the Central Board of Excise and Customs (CBEC), in case any retailer imposes GST over the MRP of the commodity, consumers are entitled to lodge a complaint against him/her. The objections can be filed at the Consumer Disputes Redressal Forums (viz. Consumer Courts) or various anti-profiteering commissions established under GST Act, 2017 or CBEC MITRA help desk or any other local bodies, if available.
Since MRP is inclusive of all the taxes, therefore, the sellers are not in a position to charge a single penny extra over and above the price affixed on the commodities. But they have the authority to sell the commodities at a price less than MRP. For instance, in the above example, the merchant can sell his product for Rs.700. However, a product can be sold by way of discounts on MRP. Let’s understand the concept more clearly with the help of 1 illustration.
Rohit goes to a famous retail outlet in Delhi for purchasing pair of shoes charging GST at the rate of 18% and MRP being Rs.2000/- (inclusive of all taxes). The retail outlet was offering a discount of 50% on the pair of shoes selected by Rohit. However, on the invoice, Rohit was charged an amount of Rs.1180 instead of Rs.1000. the split-up of the invoice are as under:
Discount 50% Rs.1000/-
Net MRP Rs.1000/-
GST 18% Rs.180/-
In the above illustration, levying a GST of Rs.180/- is grossly misinterpreted as the discount of Rs.1000/- is offered on the MRP of the shoes which is inclusive of all taxes and therefore, will also include GST. The net MRP arrived at, post discount is also inclusive of GST. Therefore, charging GST on the net MRP will be unlawful.
An example of how apparel brands are charging GST on discounted products is given below-
Suppose, there is a shirt costing Rs.1500/-. So, it must be including GST@ 5% which comes to Rs.75/-. Now, these apparel brands give discounts on the base price (Rs.1500 – Rs.75 = Rs.1425/-) and not on the MRP (Rs.1500/-).
So, for 50% discount, if it is given on base price then, discounted base price is Rs.712.5/- and then GST @5% on this is equal to Rs.35.625/-. So, the consumer gets the shirt at Rs.748.125 instead of Rs.750.
This has also been made clear by the National Consumer Disputes Redressal Commission vide its judgment of Aero Club (Woodland) vs. Rakesh Sharma wherein the court in similar incidents held the seller guilty of Deficiency in Service as well as Unfair Trade Practices since the discount offered does not equal to the one received by the consumer and the seller’s such practice resulted in ‘Double Taxation’.
Consequently, if any retailer has charged GST or any other tax over and above the MRP after a discount or without a discount, then being a vigilant consumer, you are obliged to speak up.
Penalties for levying GST on MRP commodities:
A strict penalty of Rs.1 lakh or 1 year of imprisonment would be imposed if a seller is found charging a price more than the Maximum Retail Price.
Frequently Asked Questions:
1. How is the Maximum Retail Price printed on packets advantageous for you?
The Maximum Retail Price printed on packets is instrumental for us as consumers because it imposes limits on the seller from selling commodities at a higher price than quoted. But consumers do have the right to bargain with the seller for a price less than the MRP.
2. Is the marked price and MRP the same?
Marked price is the price at which the commodity is made accessible by the manufacturer to the seller. Thus, it is the lowest price at which the seller is empowered to sell the commodity. Whereas, on the other hand, MRP is the highest reckoned amount (including all taxes) that can be levied by the makers of the commodity.
3. Can a product have 2 MRP?
All the sellers must mark the MRP. Also, it is restrained from declaring 2 MRP on the same commodity. This step has been taken so that the consumers do not get confused while paying the price at places where the commodities are charged at higher prices like a movie theatre, airports, etc.