VAT rate reduction, but supermarket suppliers are complaining. What's going on?

"To be honest, after working for so many years, I've never seen such shameless behavior." This morning, Dabin (pseudonym), the regional KA channel manager of a well-known FMCG listed company, complained to a reporter.

The reporter was taken aback. Upon further questioning, Dabin sent a news video and explained the reason.

Unexpectedly, a similar incident to the one in the video happened to Dabin.

It turned out that recently, Dabin had received notices from several large supermarkets, including Lawson convenience stores, Lotus Supercenter, Sinopec Easy Joy, and Shell, with roughly the same message: the large supermarkets directly reduced the supply price by 3% in their systems.

Dabin had signed annual contracts with these supermarket channels, and the supply prices were based on tax-inclusive prices, so this notice made him very angry.

"I didn't expect the tax cut to be so significant."

According to the "Announcement on Policies Related to Deepening VAT Reform" jointly issued by the Ministry of Finance, the State Taxation Administration, and the General Administration of Customs on March 21, 2019, for general VAT taxpayers engaged in taxable sales or imports of goods, the original 16% tax rate is adjusted to 13%, and the original 10% tax rate is adjusted to 9%.

On April 1, a salesperson at a food manufacturing company received a phone call from a large supermarket, informing them that the tax-inclusive supply price of their products would be reduced by 2.6%. Shocked, they quickly realized it was not an April Fool's joke.

Relatively speaking, a phone call is a polite approach. According to media reports, some suppliers found that in the sales system of China Resources Vanguard, the tax-inclusive supply price had been directly reduced by 2.6%.

"We hadn't been happy for a few days when we saw that large supermarkets like China Resources and Walmart had directly reduced supply prices by 2.6% in their systems, citing the national VAT reduction," Lin Le (pseudonym), a National People's Congress deputy and chairman of a listed company, told China Economic Weekly.

Another NPC deputy, Wang Wu (pseudonym), chairman of a food manufacturing company, also said that a 2.6% price reduction is equivalent to taking all the tax reduction benefits that manufacturing enterprises should have received and putting them into the retailers' pockets. "If it comes to that, we might as well stop supplying!"

Why 2.6%? Lin Le explained while calculating on paper: Taking a product with a pre-tax price of 8.62 yuan as an example, before the tax cut, with 16% VAT, the tax-inclusive price was 10 yuan; after the tax cut, with 13% VAT, the tax-inclusive price becomes 9.74 yuan.

Lin Le said, "Now, large chain supermarkets like China Resources and Yonghui are demanding that the original 10 yuan tax-inclusive price be reduced by 2.6% to 9.74 yuan."

Wang Wu also told China Economic Weekly that his company had received the price reduction notice, and the 2.6% adjustment was because of the VAT reduction.

Lin Le said, "By doing this, our pre-tax price remains unchanged, and the tax burden on manufacturing enterprises is effectively unchanged. The policy dividend that the state originally intended for manufacturing enterprises has been forcibly taken away."

How to calculate this?

Obviously, if the current supply price of 10 yuan is maintained without adjustment, Lin Le's company would enjoy the 3% VAT reduction dividend. Ignoring other factors, with a gross margin of 45%, how big is the VAT reduction bonus?

The calculation is simple: before the tax cut, 45% × 16% = 7.2%; after the tax cut, it becomes 5.85%; plus the corresponding reduction in education surcharge and urban construction tax, the company's profit margin increases by 1.485%. With annual revenue of 3 billion yuan, the company is expected to increase net profit by 44.55 million yuan.

"I really didn't expect the tax cut to be so significant. I clapped my hands until they were red," Lin Le recalled when listening to the premier's government work report.

Retailers also have a significant tax reduction bonus. The average gross margin in the retail industry is about 25%. For the above product purchased at a tax-inclusive price of 10 yuan, the selling price is 12.5 yuan, and the value-added portion of 2.5 yuan is subject to VAT. After a 3 percentage point reduction, they can enjoy a 0.75% dividend.

The chairman of a large supermarket listed company once publicly stated that, based on comprehensive calculations, the tax cut could bring about 1 percentage point of new net profit to his company. Based on a revenue scale of 5 billion yuan, that would be 50 million yuan in net profit.

Does tax reduction necessarily mean price reduction?

Since all parties in the chain can benefit from the tax cut, why do retailers require suppliers to reduce prices?

Feng Qiaobin, a professor at the Department of Economics of the National Academy of Governance, believes that VAT is an indirect tax; when the tax rate decreases, it should be passed on to the downstream, and the sales prices at each link in the chain should be adjusted downward accordingly. Of course, the final retail price should also decrease.

The retailers' reasoning is: since the state has reduced taxes, suppliers should pass on the benefits to retailers, and retailers should then pass them on to consumers by lowering terminal product prices.

Mr. Liu, a deputy general manager in charge of marketing at a listed company, showed a reporter from China Economic Weekly a supply order where the supply price to retailers had been reduced by 2.59%, but he found that the retail prices in the supermarket had not been adjusted accordingly.

In response, Liu Gang, a senior executive at a large supermarket, told China Economic Weekly that after the tax cut, more than 10,000 products in his supermarket had recently been reduced in price. "Everyone in the entire industrial chain can enjoy the tax reduction dividend, and each link is different. If the terminal price doesn't drop, that's just being unreasonable."

Liu Gang also said, "Tax reduction is a systematic adjustment of interests; the whole society enjoys the dividend, not a single link exclusively, and no one can monopolize it."

VAT is a chain. Simply put, if the tax is reduced by 3 percentage points and the final selling price remains unchanged, the entire industrial chain, from raw materials to final products, would earn about 3% more overall profit. But who gets this bonus depends on their position in the chain. Most companies actually don't get much; they just reduce some financial pressure.

To put it more clearly: in the mid-to-upper reaches of the industry, unless a company has a particularly strong position, customers will demand a price reduction when taxes are cut; otherwise, the customer would lose money! VAT is an indirect tax, and goods are recorded at the pre-tax price. For example, a product with a tax-inclusive price of 116 yuan, with an input tax of 16 yuan, has a cost of 100 yuan. If the tax is reduced and you still charge the customer 116 yuan, the customer's deductible input tax is 13.35 yuan, making the cost 102.65 yuan, which is higher. Would the customer agree? So unless a company has a particularly strong position in the chain and controls pricing, manufacturing enterprises won't enjoy much benefit; they just have less capital tied up and slightly lower surcharges due to reduced tax payable. But companies closer to the downstream and end consumers are different. When taxes are reduced, do supermarket goods prices drop? Basically not. So for a product with a tax-inclusive price of 100 yuan, the supermarket's revenue was 86.2 yuan before, and after the tax rate reduction, it becomes 88.5 yuan. Isn't that a profit?

Of course, companies like Gree Electric, mobile phone manufacturers, and car manufacturers, which are closer to end customers and have a strong position in the chain, will definitely get a large share of the tax reduction bonus.

Supermarket channels that cannot be offended

As is well known, FMCG is an industry where channels are king. Those who control channels control the market, and everyone fears losing their channels.

Among the many channels, the supermarket channel is one of the most powerful. This reduction in supply prices is a manifestation of that power. In addition, some large supermarkets and malls, relying on their monopoly position in sales channels, charge suppliers various "unreasonable fees" such as account opening fees, entry fees, barcode fees, display fees, and rebate fees. A proposal from the Xiamen Municipal Committee of the China Democratic League once showed that some retailers charged as many as 17 unreasonable fees.

A small supplier said, "Everyone is afraid." Indeed, in the retail industry, channels are king, and those who control channels control the market; everyone fears losing their channels.

Wang Wu revealed that currently, there is intense direct confrontation between suppliers and retailers, but no supplier dares to show their cards directly. "Once negotiations break down, it means losing a channel and losing tens of millions or even hundreds of millions in sales."

"Under a market economy, it's a game. If you don't lower prices, others will lower prices to grab market share," Liu Gang said more bluntly.

Lin Le believes that retailers forcing suppliers to lower prices under the pretext of tax reduction is suspected of abusing their strong position in the channel, or even oligopolistic monopoly, to squeeze suppliers.

On this point, Wang Wu lamented that manufacturing enterprises have always been in a very weak position. "Large supermarkets control profits by slicing the sausage, cutting it bit by bit. When it reaches the limit and manufacturers can't continue, they have to exit."

What should distributors do?

Regarding this tax reduction, a tax department official said: "VAT is an indirect tax generated in the production and sales links. It is transferred sequentially through each link, collected by the seller from the buyer, and ultimately borne by the end user."

According to Professor Feng Qiaobin's explanation, when the tax rate decreases, it should be passed on to the downstream, and the sales prices throughout the industrial chain should be adjusted downward accordingly, including the final retail price.

But Dabin provided the reporter with price tags from the supermarket and clearly stated that the supermarket had not made corresponding reductions to retail prices. In Dabin's view, supermarkets usually determine supply prices based on ensuring at least 30% gross profit when selecting suppliers. Logically, if the supermarket simultaneously lowered retail prices, he could understand. But now, with his supply price reduced and retail prices unchanged, apart from the supermarket channel, upstream manufacturers and downstream consumers have not benefited from the tax reduction dividend.

Dabin said that, on the one hand, as a large FMCG company, terminal prices cannot be adjusted based on price changes in some supermarket channels; on the other hand, the tax reduction dividend being taken by the supermarket channel directly impacts his region's revenue and net profit.

However, the tax department official also said that a reduction in the VAT rate does not necessarily mean all market entities in every link will benefit. Given a fixed tax reduction, the specific effect on each entity depends on the supply-demand relationship, pricing methods, and bargaining power of the parties involved in each transaction.

For the future, Dabin said he has only two options: first, continue supplying at the supermarket's current price while negotiating, since only 20-30% of supermarkets have reduced supply prices, leaving some room for negotiation; second, because the original contract stipulated that supply prices could only be adjusted after mutual agreement, the supermarket's unilateral price adjustment means he could choose to stop supplying. In Dabin's view, at the current reduced price, he would incur losses, so the likelihood of stopping supply is high.

A senior financial professional in the FMCG industry told reporters that when signing annual (long-term) contracts with powerful channels like large supermarkets, suppliers should ideally execute at pre-tax prices. This way, regardless of the tax rate, you can simply add the tax point on top of the pre-tax price, avoiding such conflicts.

But whether this approach can be accepted by powerful supermarkets is another question. Under the new tax rate policy, if neither distributors nor consumers can obtain the policy dividend, and it becomes a monopoly enjoyed solely by supermarkets, does this violate the original intention of tax reduction to benefit the people and enterprises?

-END-