MRP–does it make sense?

India’s got a really interesting sticker on almost every product on the market – the MRP, Max Retail Price. I used to think this was great as this meant products had clear pricing listed for the customer’s benefit and was more than happy to pay up the listed MRP. Lately with my visits to the Kotla market nearby, I’m learning that MRP really is the upper limit for an item and I’d be hard pressed to find anyone in this competitive market sells at this price. This whole bargaining trip indicates the same. Almost everything is up for bargain and the ceiling under which they operate is the MRP.

Pearl Pet, a producer or reasonable quality plastic kitchen ware sells a pack of 6 1 Liter water bottles. Listed MRP is approx. 240 180 Rs. If you were to buy this in any upscale market, this is the non-negotiable price you’d be quoted 99% of the time. At Kotla, the starting price is 160 Rs. I got my set for 130 Rs. after looking around a bit.  And as per the source I spoke to at the shop, their cost price was 120 Rs. So, the MRP appears to be a 100 50% mark-up on the cost price (to retailer) in case of plastic kitchen ware and 84 38% on the retail.

Here’s a short table with MRP vs. retail price:

Product MRP (Rs.) Retail Price (Rs.) % difference
TV 40,900 31,500 30%
Kitchen Ware 240 180 130 84 38%
Electric Geyser 3,150 2,350 34%
Washing Machine 19,490 17,700 10%

While researching the topic, I came across the following viewpoints:

  1. Indian Express 1990 – Get retailers to print price on the goods and do away with MRP. This article has a great description of how the MRP is set and why it may not make sense to keep this system.
  2. Legal Service India – they give you the legal low down and take a very anti-capitalist stance with the opening shot against the manufacturers.

I guess this is an interesting topic to think about and shows the Indian divide; on one end you’ve got the entrepreneurs who want to create products with value and are burdened by the need to manage the complexities of varying profitability across states and the consumer viewpoint where profit is seen as a necessary evil.The complexity of indirect taxation and tariffs inside India pose a major barrier to trade, so perhaps instead of targeting manufacturers or retailers as evil doers why not focus on the source of complexity and seek to simply that? In effect, why not look into ways of simplifying indirect taxation within India and overhauling this MRP system.

What’s a direct tax?
Direct tax is collected by the government departments from the bodies who are to be taxed, e.g. income tax. It’s deducted directly from your salary with no intervention on your part.

What’s an indirect tax?
Taxes collected through intermediaries. Generally any financial transaction (purchase or sale) has a tax attached. So if you buy coke, pay for a dinner, pay your rent, etc. there is a portion of this amount that goes into the government coffers. It is collected by the seller. Hence an indirect tax.

Digging further into this issue, I found an excellent post talking about the evolution of inter-state trade in India and the legalese behind it (caveat – this will give the lay reader a case of acute boredom, possibly followed by a painful sensation induced by excessive stress on the comprehensive centers of the brain the forebrain, aka headache). 

The complexities are such that Deloitte and PwC have practices that help businesses with advisory services to address the impact of indirect taxation. Here’s the link to a conference that’ll be held in November. I’m not sure if this is as much of a challenge in more developed countries.

India seems focused on a program to reform indirect taxation with the Goods and Service Tax (GST), which should (according to the website) simplify taxation and bring prices down for consumers, which in turn will boost trade and consumption resulting and greater tax yields. Why? That is a tw0 part question question, because the question really is, “how is GST better than the current state of affairs?” The first part is about how taxation works in India constitutionally at the Central and State levels (current state) and the second part is about a prediction on how it will work post GST (future state). Here’s a rough table outlining who benefits from what in the current taxation scheme:

Exclusive Beneficiary Taxable Product
  • Manufacture tax
  • Service tax
  • All sale of movable goods

Central taxation is uniform across all States. Each State may apply various taxes under the umbrella of “all sale of movable goods”, e.g. entertainment, luxury, amusement, tax on goods transported via roads and entry of goods into a local area for sale or consumption. Here’s an example that may help clarify this. For a particular product State A has taxes X, Y and Z at 4, 7 and 3 percent respectively. State B could have taxes Y and Z at 9 and 2 percent for the same product. Consider the number of goods in an average household and consider the possible taxes that could be applied on these goods in your State. As you can imagine, it is a painful state of affairs. How do you expect companies to react when trying to set an MRP with this state of affairs? 

GST brings the promise of simplification. GST envisions a Central tax and a State tax for Goods, for Services and for Concessional items. Which means that the States and the Center will share a common income source.  Calculating taxation would then be a matter of determining which category your commodity falls into (Exempted goods, Special Rate goods, Standard Goods, Concessional goods or a Service) and applying the relevant Central and State taxes. I used the video below to develop my understanding of the vision of GST, among other resources.

The implementation of GST has fallen hostage to opposition politics according to Finance Minister, Pranab Mukherjee. Initially the expected implementation was April, 2011 but now it seems that it may be delayed till late 2012.

Why is the GST causing such an uproar and why is the implementation stalled? This long article that goes into much (read as: putting me to sleep) detail about the current consensus on the GST. The length of this document is testament to the conflicting interests and viewpoints at play.

The debate over GST is nowhere near done. Business leaders and the Central government are pro GST. The States on the other hand have a list of reservations. Some of the concerns of the States are:

  • What gets exempted – in a sense the debate is about what is a necessary commodity; quite philosophical
  • Perception that the Center is intervening in matters which are in the State’s area of jurisdiction – changes to the constitution will be required, so changes will be permanent (or as permanent as the constitution is).
  • Specific rates – Loss of income from taxation is a major concern here. After all, while the consumer and businesses may be winners, will this merging of the taxation pools benefit the States? The devil we know (status quo) or the devil we don’t (post GST) problem.
  • Dispute resolution with the Center

The Empowered Committee of State Finance Ministers on GST is the key body representing the States’ point of view. I find it hard to imagine that the GST will ever pass and with my poor understanding of Center vs. States and party politics, I’m nowhere near qualified to even judge whether this would be a good move. I’ve spent the whole day researching and writing this article and I’m disappointed at the amount and quality of material that’s available online that could shed more light on the different points of view. One thing is clear to me. If India is to count itself in the rank of developed nations, the Government of India, the State Government, businesses operating inside India, the NGOs and the Citizens will all have to raise their game. And it all starts with our duties as Indian Citizens. In effect, the fact that MRP does not make sense is our collective problem, and its not the only problem we have.

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