Garment retailers shift from MRP to 'fixed price' regime

Move aimed at avoiding paying excise duty for garments priced at Rs 1,000 and above

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Five months after the government levied excise duty on garments priced at Rs 1,000 and above, manufacturers have started shifting from the maximum retail price (MRP) regime to a ‘fixed price’ one. Since the levy, announced by Finance Minister Arun Jaitley in Budget 2016-17, is based on MRP of garments, irrespective of the actual realisation for the retailer, retailers end up paying excise duty for any discounts they offer. Offering seasonal discounts is a usual practice by retailers to exhaust old stocks to make room for new ones.

For example, a branded shirt with an MRP tag of Rs 1,400 is sold with a 50 per cent discount. Then, the actual realisation for the retailer works out to Rs 700. If the retailer sells the same shirt on a ‘fixed cost’ basis at the same price, there will be no change in the retailer’s realisation.

“It makes business sense to shift to ‘fixed price’ tag with actual realisation rather than tagging with MRP and offer heavy discounts thereafter. Such a shift will not only prevent us from calculating excise levy payment, but also lower duty payment burden,” said Vijay Agarwal, managing director of Creative Garments, and former chairman of Apparel Export Promotion Council.

Excise duty will be applicable only for those manufacturers who do not claim input tax credit (ITC), popularly known as central value-added tax (Cenvat) paid on various raw materials. Manufacturers who claim ITC, however, will need to pay 12.5 per cent duty. Until now, excise duty was nil on manufactures without ITC claim and 6-12.5 per cent for those who claimed ITC. Through this shift, it is expected that around a third of garments currently priced at Rs 1,000 would be exempt from the excise net as their ‘fixed price’ will be under Rs 1,000.

“Excise duty on garments is levied for years. In the last Union Budget, however, it was capped on a branded garment with a price tag of Rs 1,000. So, retailers are changing their business tactics,” said R K Dalmia, chairman, The Cotton Textiles Export Promotion Council and senior president at Century Textiles and Industries. According to trade sources, existing stocks continue with the MRP tag with offer of 40-50 per cent discount.

But, new stocks come only with a ‘fixed price’ tag.

This means, customers might not find discount offers of 40-50 per cent or “buy one, get one free” kind of banners on the walls of garment retail shops.

So, the product mix of garments stocks has seen a rapid change in the past four months. From around 100 per cent of MRP–based products before the Union Budget in February, half of the stock is now coming with ‘fixed price’ tags. “Earlier, MRP was fixed on inflated basis to consider all aspects including discounts, duties etc. So, even if the actual realisation was lower than the statutory excisable price limit of Rs 1,000, excise duty was paid. On MRP, however, huge discounts were offered to attract customers’ footfalls. Now, manufacturers would fix a tag with the genuine price,” said Rahul Mehta, president, Clothing Manufacturers Association of India.

Fixed price or genuine price, according to Mehta, would include cost of manufacturing and other expenses such as duties, labour and transportation costs.