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Hidden taxes discolour white & brown goods
February, 24th 2007

Consumers in India are hoping for a better deal from finance minister P Chidambaram this time round as he gives final touches to Budget 2007. Indian consumers are paying a hefty lot more than their counterparts in China or the UK for a refrigerator or when simply filling fuel in their cars.

And thats because the taxmen in the country have loaded a huge tax component in the retail price of your personal and home appliances. While 21% of the retail prices of washing machines, refrigerators and microwaves in India are on account of excise and sales tax levies, the corresponding figure is only 15% for China and the UK.

Put simply, if a consumer is paying Rs 100, maximum retail price, for a washing machine in India, then Rs 21 is on account of the indirect tax levies such as VAT and excise the duty levied on goods manufactured within the country. However, in China and the UK, only Rs 15 of Rs 100 is on account of taxes.

According to a KPMG study, the total indirect tax as a percentage of the price to the end consumer for automobiles is almost 85% higher in India compared to the UK, and marginally higher than in China. For instance, 24% of the retail price of a small car is on account of the indirect tax component in India, and for other cars, the corresponding figure is 28%. In China, the corresponding figures are 17% and 27% for small cars and larger cars respectively. In the UK, it is a flat 15%. The study is based on several assumptions, a KPMG official indicated.

A comparison of the indirect tax component in the final prices of consumer durables can be made only after taking into account purchasing power parity. In China, the indirect tax component may be lower, but the levies may be made up through some direct tax, said PricewaterhouseCoopers (PwC) principal consultant MS Mani. In China, for instance, entrepreneurs are given land free of cost and water, and electricity supply at concessional rates, which amounts to a subsidy. This may be made up through some direct tax levy on consumers, he explained.

The final price a consumer pays on a product includes its cost plus several indirect taxes such as excise and VAT. Higher tax levies inflate the final price of the product for the retail consumer. Thus, a reduction in tax levies benefits consumers through cuts in retail prices.

Mobile phones are the only item where Indias levies are lower than those in China and the UK. While only 3.8% of the final price of a cellphone is on account of indirect taxes in India, the levies account for 15% of the retail selling price in China and the UK.

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