Prices for goods or services are either quoted readily inclusive of VAT, particularly where the goods/services are supplied mostly to private individuals, or exclusive of VAT. It is presumed, where a price is silent as to whether VAT is inclusive or exclusive, it is deemed to be inclusive. In other words, unless a price specifically states that it is plus VAT, it is generally deemed to already include it.
Businesses will need a robust pricing strategy, built on a thorough understanding of their customers, and need to be aware that their customer base may change as people tend to be price sensitive.
With the introduction of VAT there are typically 4 kinds of pricing behaviors that we will see in the market. These are:
1. Business will increase prices on January 1, 2018 up to the level of VAT (i.e. 5%)
2. Few will absorb the VAT impact within the business.
3. Some will plan to gradually increase prices over a period of time from today leading up to January 01, 2018 and few have already increased their prices.
4. On the other hand their will be retailers and consumer goods manufacturers who will raise prices over and above the 5% VAT rate increase.
Given that the majority of companies recognize that it will be a challenge to increase prices, it is critical that businesses understand the impact of price rises on their markets, before making sudden changes to pricing structures to coincide with the VAT.
Do you know what will you choose and why? The timing of working around on the Pricing must be right. In today’s price-sensitive market, any increases may well have a damaging effect on sales volumes. Businesses will need to understand the overall impact on all business functions.
In the bid to keep prices low, some businesses will plan to not to pass on the additional cost of the VAT increase and will instead choose to absorb the cost within their business. This will be a dangerous strategy for those struggling with working capital.
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