Thread by @deepakshenoy

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. 118. This is Rs. 100 + Rs. 18 GST.

I have input costs of Rs. 70+18% GST = 70+13 = 83.

I earn gross profit = 118-83=35.

I pay a net GST to govt of Rs. 5. My profit is Rs. 30.

Now government says my product is GST exempt. Now what?

Assume that I am not allowed any "refund" of input taxes.

I will spend Rs. 83 on inputs, this includes GST. I want to continue to make Rs. 30 profit.

So I'll price the pads at Rs. 83+30=113.

Earlier the price was 118. Now it's 113. That is a Rs. 5 drop.

You'll notice that all that went down was the GST on my profit (rs. 5) which is my value addition, effectively. The lesser I make in profit, the lower the difference in price due to the exempt nature.

But prices should fall, not rise. The difference, though might not be big.

There is a caveat - inverted duty. The actual GST on pads was 12%. Inputs can be at a higher rate, say 13%. Now what?

My selling price was 100+12% GST = 112.

My inputs at 70+13% GST = 79

I would make Rs. 33 gross profit. Of which I would pay Rs. 3 GST, my margin is Rs. 30.

But now, no GST. SO I buy at 79. To make Rs. 30 I have to sell at 109 (Rs. 30 higher)

109 is still lower than 112 earlier. But the reduction is tiny.

Further complications: I may not have output GST for pads, but I might make other things too. So the input GST I pay can be offset against other GST I collect. (Strictly speaking this should not be allowed, but practically it's difficult to segregate)

So, If I charge Rs. 109 and I still have Rs. 9 input GST that I can offset partly against other product sales, then I actually make Rs. 39 profit, much more than earlier.

It's possible I might be able to reduce my output prices substantially more in this case.