GST on MRP – Meaning, Rules & Calculation

The Goods and Services Tax (GST) is a type of indirect tax on the supply of goods and services introduced in 2017. Before GST, business owners had to pay tax at every stage of the supply chain, which led to an addition of taxes reflected in the final price or the maximum retail price (MRP) of a product.

The GST ended this cascading of taxes by allowing you to claim input tax credit. This means that if you have paid taxes at some stage of the supply chain (like raw material purchase), you have to pay a lower overall tax on the final product, as you can claim the previously paid taxes.

When customers buy a product or service, they look for the MRP. If you are wondering what happens to MRP under the GST regime, we’ve got you covered. Consider this your complete guide to what is GST on MRP, its rules, and calculation.

What is MRP?

When you go shopping, the first thing you check when picking up a product is the MRP. MRP stands for Maximum Retail Price and is the highest price a manufacturer can levy on a product. MRP includes GST and gives you a complete financial estimation of the product, significantly influencing your purchase decisions.

The idea of MRP came up in 1990. Before MRP, the seller was supposed to calculate the final amount by adding some taxes. This led to some sellers taking advantage of the offer and charging exorbitantly high prices by adding imaginary taxes.

According to the Consumer Goods Act, a seller cannot charge more than the MRP for a product. If a seller is caught charging more than the MRP, they can face a penalty of up to INR 1 Lakh or imprisonment for up to one year. However, a seller or vendor can charge below the MRP to attract sales.

What is GST?

The Goods and Services Tax is an indirect tax that is applied to goods and services at the point of sale. The key objectives of GST are as follows:

• Eliminate the cascading tax effect: Multiple indirect taxes have a cascading effect on the final price of the product or service. GST aims to eliminate this effect and reduce the final price. This is achieved through the input tax credit mechanism.
• Inclusion of all indirect taxes: GST aims to simplify the tax structure by including all indirect taxes, such as VAT, cess and surcharge, custom duty, etc., in a single tax.
• Decrease tax evasion and corruption: GST aims to reduce corruption and tax evasion by introducing more transparency in the tax system.
• Increase tax compliance: Through a simple online registration and returns filing process, GST aims to increase tax compliance, especially among small and unorganised businesses.
• Increase productivity and efficiency: The GST also aims to increase productivity and efficiency by removing multiple indirect taxes, logistic constraints and lengthy claim processes for input tax credits.

Effect of GST on MRP

Since MRP is the maximum price a seller can charge, MRP includes GST. In GST, different products and services fall under different tax slabs which are 5%, 12%, 18%, and 28%. Hence, depending upon the tax slab, the MRPs of various products changed from pre-GST to post-GST.

Further, due to an amendment, if one product is moved from one tax slab to another, its tax rate changes, affecting the MRP, which can reduce or increase depending upon the change.

Another factor that affects MRP post-GST is the availability of input tax credit. For products with input tax credit, the MRP will generally be reduced under GST and vice versa.

To understand this better, we will first understand how MRP is calculated along with GST.

MRP Calculation with GST

The formula to calculate MRP is:

MRP= Manufacturing costs + Cost components + Other costs + GST

Here, cost components include:

• Cost and freight margin to cover import costs when applicable.
• Packaging or presentation cost to cover design for product packaging.
• Stockist and retailer margin to cover the profits earned by distributors and retailers.
• Shipping cost to cover transportation cost from manufacturer to seller.
• Marketing and advertising costs to cover the product or service promotion

Other costs include any other expenses incurred on the product or service apart from cost components.

Manufacturing cost, cost component, and other costs give the original selling price of the product or service. GST is applied to this final selling price as follows:

GST amount = (Original selling cost*GST rate)/100

MRP = Original selling cost + GST

From this, you can see that MRP includes GST and how introducing the GST led to changes in the MRP due to changes in the original selling cost and the GST tax slabs for the product or service.

Rules regarding MRP under GST Amendments

If you are a business owner or manufacturer, you must follow these guidelines if you want to revise MRP due to GST changes:

• You must ensure that the old and new MRPs are distinctly visible on the product. There should be no overwriting.
• The new MRP should not exceed the sum of the old MRP and tax change.
• You must notify the customers regarding the price change through newspaper advertisements.
• You must also inform the relevant authorities regarding the price change.
• If the price has been reduced after GST changes, you are not required to advertise the same.
• You must ensure that the old and new MRP stickers are placed on the product and are visible clearly.

Concluding thoughts

This brings us to the end of the MRP includes GST discussion. We hope the clarity on the basics of GST on MRP will help you in your new business venture. When starting a new business, the most overwhelming concern is funding. While you can find your business from savings, a business loan lends more convenience and personal freedom.

Tata Capital’s MSME business loan provides flexible tenure and attractive interest rates. What’s more, you can use their goods and services tax calculator to calculate GST on your business loan accurately.