Paint makers in India have increased prices of their products several times in the past years owing to the increase in the prices of raw materials and import duties and depreciation in the rupee value. However, the recent cut in the GST rate of paints has created a dilemma for these companies as they have to pass on the tax reduction benefits to the consumer in order to avoid anti-profiteering.
The continuous depreciation in the rupee value is creating problems for all the Indian businesses that import raw materials from out of the country. Paints industry is one of the biggest importers of raw materials. The cost of Brent crude has increased several times in the past years, which has contributed to increasing the prices of raw materials like crude oil based materials, titanium oxide and monomers. Consequently, paint makers have to increase the prices.
While paint prices were hiked by 5% in the 2018 fiscal year, another hike of 2-3% took place in the June quarter. Increase in prices kept leading manufacturers like Asian Paint Ltd to keep their manufacturing activities afloat while earning good enough margins.
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Meanwhile, the GST (goods and services tax) committee decided to reduce the tax rate on paints from 28% to 18%, making it compulsory for paint markers to pass on the benefits to consumers in the form of reduced prices.
The price cut in GST rate and the fear of anti-profiteering clause almost forced these companies to compromise with their margins and provide full benefits to consumers, despite inflation in input costs. If it had not been for the anti-profiteering clause, another hike in the paint prices was almost certain, which is a tactic for the industry to pass on the cost burden to consumers to maintain its margins.
In order to avoid getting scrutinised under the anti-profiteering clause, the companies will as of now have to refrain from hiking the prices because of the GST rate cut, reported the Asian Paints management. Firms will now have to avoid increasing prices despite inflation in input cost, which will have a direct impact on gross margins of these companies, says the management in a conference call with analysts.
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Berger Paints India, however, said that it is not reluctant to hike prices in coming quarters if the cost of raw materials continues rising and the value of rupee further depreciates.
In case if the paint companies continue to avoid increasing the price of their products, their gross margins are likely to reduce by 20-30 basis points in the next quarter, as per analyst reports. This is also likely to have an impact on the overall growth of the industry in the ongoing financial year.
