Up to December 1990, manufacturers of packaged commodities in India, had the option to print the price of the commodity on the package in two separate ways--retail price Rs ..... (local taxes extra) and maximum retail price Rs..... (inclusive of all taxes).In the year 1990, the ministry of civil supplies and its executive wing, the Department of Legal Metrology, decided to change the Standards of Weights & Measures Act (Packaged Commodities' Rules) so that all manufacturers had to print the max/retail price, inclusive of all taxes.
The reason this was done was that several complaints had been received by the ministry from consumers as well as consumer organisations, alleging that retailers were over-charging consumers as they were adding on a cost to the printed price, under the guise of local taxes, even when the local tax was at a much lower rate.
Furthermore, in a market where within one city, different products have different rates of taxes, it made it very difficult for consumers to check whetherretailers were actually charging the correct amount of local taxes on the products they sold.
As a consequence to the above change, all manufacturers today print a tax inclusive price on all packaged goods. This system has ensured that, by and large, there are no complaints for consumers on the issue of over-charging by retailers. However, certain other issues have come about, particularly in the area of under-charging by retailers.
Local taxes in the country mean the following taxes:
Central sales tax - by the union government State sales tax - by the state. Entry tax - by the state. Octroi - by the municipal or gram panchayat authority. Luxury tax - by the state.It is physically not possible for manufacturers to manufacture their product specifically for any one market which has a unique tax rate. Consequently, they have to manufacture the product with one single rate which is applicable all over the country, and which must be a legal rate in every singlestate, municipality and gram panchayat.
Manufacturers use three methodologies to do the same:
They print a weighted average price. This system works if a manufacturer accepts that his profit margin will vary from state to state and municipality to municipality. This is normally unacceptable to any manufacturer. The manufacturer prints a price, exclusive of tax, and reimburses the actual taxes paid to his distributors, retailers etc. Thus, the so called nil tax price actually includes an element of tax built-in. Once again, the manufacturer has to accept varying rates of profitability from state to state. The manufacturer prints the price prevailing in the market with the highest tax rate. The problem with this is that it means consumers in markets with lower tax rates have to pay a price which they are not intended to pay. The only persons who gain in such a scenario are members of the trade. Very often, due to competitive pressures, members of the trade pass on this so calledadditional margin to the consumers by charging the consumers a price lower than the print price.In addition to state and local taxes, another factor which determines changes in price from state to state, are accepted retail margins. Retailers in large cities, with very high overhead costs due to municipal taxes and land prices, require a higher precentage margin than retailers in smaller towns. Manufacturers, however, are not permitted to charge differential rates when making their sale.
Consequently, they build-in a margin normally equivalent to the higher required margin, into their products. Retailers in smaller towns or those retailers who are willing to work with a lower margin, then sell to consumers at prices lower than the printed price.
The above are the main reasons why products in India, very often sell at prices lower than the printed price.
However, what is extremely important is whether manufacturers should have the right, let alone the duty, to print the price to consumers on the goodsthey manufacture. The moment you let manufacturers print a price to consumers, it tantamounts to authorising manufacturers to dictate the profit and profitability which retailers and other members of the trade can get. This itself is violative of the very principles of free trade and infact, is also violative of the RTP parts of our MRTP Act.
The next issue to be considered is the ethical issue of whether retailers and manfacturers should be allowed to decide on their own profit margins or whether this margin should also be regulated by the government on a `cost plus' basis.
This controlled price system goes against the very gain of free market economies as it invariably results into inefficiencies, cost overruns, bloated work forces etc.
In the interest of the Indian consumer, consumer protection agencies in India must therefore concentrate on petitioning the government on changing the law, in favour of prices being put on products only by the retailers and not the manufacturers. Only then will theconsumer know exactly at what price goods can be purchased at, and only then will we give a change to our free market reforms to really work.
(The author is a retired brigadier of the Indian army)
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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