Companies rush for advice to stay afloat in VAT

MUMBAI: With just about 10 weeks for the value-added tax regime to kick in, FMCG, consumer durables and pharmaceutical firms are rushing to tax consultants to assess the possible damage to bottomlines.
Heinz, Godrej Sara Lee, Dabur and Aventis are among the dozens of companies that are forking out fat fees to consultants to re-work pricing while others like Hindustan Lever and Procter & Gamble prefer to work in-house.
"We have about 20 new clients for whom we are studying the impact of VAT on business. We have to help our clients decide on the options available on pricing," says Ernst & Young partner Ajay Mehra.
For instance, companies may either choose to increase prices or to absorb the extra tax burden as a result of VAT. In a competitive environment, it may be difficult to increase prices and there is a possibility that industries may decide as a whole to resist price hikes, say tax consultants.
In the first stage, VAT will replace sales tax, turnover tax, works contract tax, entry tax and lease tax. As VAT is a tax that is paid at every stage of production and distribution, as compared to ST which is paid at a single point, FMCG, pharmaceutical and consumer durables industries will be impacted significantly, as they have a multi-tiered distribution system.
Earlier industry associations like the Organisation of Pharmaceutical Producers of India and the Consumer Electronics and TV Manufacturers Association had said that they may be forced to increase prices between 2 to 4 per cent, especially at a time when margins are already wafer-thin.
"In the next couple of months, we expect more firms to focus on the impact of VAT as it takes centre stage. So far they were in the wait-and-watch mode, especially as implementation of this tax has already been postponed twice," says Mehra.