A worker does a quality control check on feminine hygiene products at the Kimberly-Clark Corp. manufacturing facility. ( Photographer: Paulo Fridman/Bloomberg)

The Optical Illusion Of 0% GST On Sanitary Napkins

Consumer products company Johnson & Johnson India Pvt. Ltd. lowered prices of sanitary napkins after the feminine hygiene products were exempted from the goods and services tax last month. Till then sanitary napkins were taxed at 12 percent GST. But prices have not come down by as much.

That’s because manufacturers can no longer claim credits for taxes paid on inputs—they could earlier set off the credits against tax liabilities.

As companies have been denied input tax credit, they will be able to pass on to consumers only the net benefit of GST exemption, a J&J spokesperson said in an emailed reply to BloombergQuint. The company cut prices of its Carefree napkins and OB tampons starting July 27 by 1-5 percent.

India’s goods and services tax law make it mandatory for manufacturers to pass on the benefit of lower GST rates to the consumer. Strict anti-profiteering penalty is slapped on those who fail to comply.

In this case, according to tax expert Rakesh Nangia, managing partner at Nangia Advisors LLP, the actual benefit to the consumer would depend on how much of the taxes paid on inputs businesses are willing to absorb. The reduction wouldn’t be commensurate with the rate cut, he said.

P&G India said it’s committed to passing the “net benefit” of GST rate cut to consumers. “We updated our systems and have been passing the net benefits to the trade starting July 27, Friday. We have also expedited processes for MRP reduction on pack(s) which will start hitting stores in a few weeks,” a spokesperson said in an emailed response. The company is also communicating the price reduction to its trade partners, modern retail partners and distributors, besides advertising it. P&G didn’t share information on the quantum of price cuts.

While larger manufacturers may be able to cushion the loss of input tax credit with GST-related gains made on other products and elsewhere in the business, smaller manufacturers of sanitary napkins said they don’t have room to cut prices at all. Anand Shahi, chairman of Health & Hygiene Initiatives India, the maker of Care 24, Be Happy and Virginia brands of sanitary napkins, said it will be difficult to reduce prices. Local companies have to pay an import tax on raw materials like glue, wood pulp and super absorbent polymers sourced from outside India, and that will make cutting prices “impossible for us”.

Suhani Jalota, founder of Myna Mahila Foundation that makes low-cost sanitary, agreed. “We cannot avail input tax credit which does not change the situation really for us as manufacturers.”

Cheaper Imports

Pressed by a campaign to promote feminine hygiene, India exempted sanitary napkins from tax. But that may have inadvertently made imports lucrative.

Here’s why as an industry expert explained to BloombergQuint…

Imported

Earlier, an importer paid 10 percent basic customs duty and 12 percent goods and services tax. So, the price of Rs 100 worth of product rose to Rs 122.

Once exempted from 12 percent GST, the price falls to Rs 110.

Locally Made

A Rs 100 product would attract 12 percent GST, taking the price to Rs 112. But on average manufacturers were able to claim up to 10 percent input tax credit and hence the price remained close to Rs 100.

Once exempted from GST, local manufacturers don’t pay 12 percent tax. But also don’t get the 10 percent input tax credit. So, the price now works out to Rs 110.

So direct import of sanitary napkins may become cheaper, according to Krishan Arora, partner at Grant Thornton LLP. This aspect, he said, would be critical for the domestic manufacturing industry, which includes multinationals.

About 25 percent of the Rs 3,000-3,500 crore sanitary napkin market comprises imports, with most of the inbound shipments coming form China, according to Rajesh Shah, president of Feminine and Infant Hygiene Association of India. They could now go up to 40 percent, he said, adding that the lobby group would approach the government to impose a safeguard duty on imports.