ANTI PROFITEERING UNDER GST ISSUES & CHALLENGES

ANTI PROFITEERING UNDER GST ISSUES & CHALLENGES 1. The provision in the Central GST Act - Section 171, mandates that benefits arising due to either lower tax rates or more tax credits being available in the GST regime should be passed on to the consumer by way of commensurate reduction in prices. Let us understand anti profiteering with an example... 2. Reduction in effective rate of tax: GST rates were reduced significantly post GST , once in November 2017 , then on January 2018, and Now in Dec 2018 .Supplier need to pass the benefit arises due to such rate reduction to the recipient If the sum total of taxes being levied on a supply prior to GST regime is more than the GST levy on the said supply, then there has to be equivalent reduction in prices of the supply. E.g. if sale of a manufactured good subject to levy of a total tax of approx. 25% (12.5% as ED and 12% as VAT) in the pre-GST regime presently attracts 18% GST, there is a reduction in rate of tax of about 6.5%. In case of supplies exclusive of tax , passing of benefit due to reduction in tax is not a big challenge. This is because the reduction in tax rate will directly be evidenced by invoices, and the recipient will get benefit of the rate reduction. 3. Benefit of increased availability of input tax credit: All the industries are getting advantage of better flow of input tax credit due to better credit chain. These are service sector, manufacturing, trading, or any specific industry So overall the expectations of anti-profiteering provisions are commensurate reduction in prices of supplies. For example, CA firms earlier could not adjust the input VAT on office supplies with the output service tax payable. Now, ITC on all inputs can be adjusted against output tax. These benefits must be passed on by them. 4. Commensurate reduction in prices :- As per section 172 of the CGST Act 2017 , such benefit shall be passed on the recipient by way of COMMUNSURATE REDUCTION in prices . What does commensurate reduction mean No guidance has emerged from the Government on the connotation of commensurate reduction and its applicability in various specific scenarios. In this scenario , it is difficult to established , how much of the benefit needs to be passed on What does commensurate reduction mean 5. Emerging Issues on Anti Profiteering Under GST Act 2017  The anti profiteering provisions have created a lot of confusion amongst the industries resulting in numerous complaints being filed more so when any person can file a complaint. Almost every contractor is in the process of invoking the change in law clause to re- negotiate the prices of the contracts especially EPC contracts. Due to unclear provisions and mechanism for calculating the commensurate reduction the negotiation process gets stretched which is leading to delay in completion of ongoing projects. 6. Difficulties in compliance : Practically , it is very difficult to comply provisions of Anti Profiteering measures There are many unanswered questions raised by business community :-  At what profit indicator level should the anti-profiteering computation be made at product/segment/business vertical/ company. It should be considered that within different product lines, there are certain SKUs which exist. Also, while there may be profits in one product line, there may be losses in others. Further, same product may be marketed differently to different class of people  How the margins and prices are to be checked is a subjective matter. Does one factor profit on products in absolute terms or as a percentage, on each type of product/service or company as a whole, make customer-wise bifurcations (in B-to-B scenarios)  While significant costs have been incurred on GST implementation, would the  same be considered in arriving at anti profiteering related decisions.  What if prices are controlled/regulated statutorily or aligned with an international benchmark  What is the accepted guideline for specific sectors with inherent complexities like real estate  Breach of Confidentiality The cost structure and pricing mechanism is something which is very confidential to a business, given the competition in the market. In such a scenario, ascertainment of profit being made on taxes by the consumers/ affected party becomes impossible.  Many companies in commodities and trade have market forces based pricing model, therefore, it is not clear how anti profiteering is going to impact the prices in these cases.  There may be external cases determining the price, for instance for drugs, medicines where other acts/ regulations have a significant interplay in the pricing of the products. Therefore, the impact of anti-profiteering has to be seen specific to these cases as well.  Computational Mechanism It is difficult to establish one to one correlation between ITC on inward supplies and Tax payable on outward supplies 7. Retail Specific Issues In addition to the above generality, certain retail specific issues arise: Retail typically has a long supply chain. There is usually one to two months of inventory in the pipeline. Hence, it would only be prudent to have time duration specified under law/ guidelines, to take corrective actions on account of changes in rates., Many retail sectors are also required to comply with Legal Metrology Act and Rules made there under, where the standard sizes for certain identified FMCG products is provided under law itself. This may possibly disrupt the requirement to pass on benefit by way of increase in quantity. 8.Consequences for non-compliance with anti-profiteering measures :- The provision in the Central GST Act - Section 171, empowers the Government to constitute an authority or entrust an existing authority to ensure compliance of anti- profiteering provisions. Non compliance of anti profiteering measures may entail severe penal consequences under the GST law. The authorities may order the defaulter to reduce the prices of supplies to ensure that the benefit of tax rate cuts or enhanced credits is passed on to the customer. While the penalties can also be levied as provided under the law, the taxpayer may be ordered to return the amount of un passed benefit to the customer along with applicable interest. In the extreme cases, the registration of the taxpayer may also be cancelled, thereby impacting business continuity. Failure to address anti- profiteering related requirements in any manner may effect consumer confidence as well as may have a reputational impact. 9. Action needs to be taken :- It is therefore critical that businesses understand the requirements and . set up processes to compute the likely benefits and have a plan to ensure smooth passage of the benefits to the consumer. (a) Computing Benefits due to Lower Tax Rates and Increased Credits: Currently, guidelines to compute the benefits have not been prescribed, yet taxpayers can compute the likely benefit at a boarder level.

• Taxpayer should identify benefits arising due to more Input Tax Credit available on account of transition to GST at organizational level.
• Once benefits arising from credit are captured, the next step should be to compute benefits from rate reduction, if any. This benefit may be computed at the product level based on cost sheet .

(b) Looping in Vendors / Supply Chain : While the above steps provide clarity in understanding how much benefit is arising at the manufacturing level, the company will also have to ensure that their vendors pass on the benefits by way of price reduction. To do this, the company will be required to get cost data from vendors. Once details are shared by vendors, their veracity should be verified by the company or through an independent firm. In case vendors are not willing to share details, some sample cost sheets can be prepared based on industry knowledge. The expected amount of benefits thus arrived at could be shared with vendors for confirmation and used for negotiation. To ensure that vendors comply with the company's requests, it is advisable to add an appropriate anti-profiteering clause in the vendor agreement stating that the vendor agrees to comply with anti-profiteering provisions and to share authentic and verified data to ensure that the benefit is appropriately passed on in accordance with the provisions. Going a step further, the clause can also state that in case appropriate benefit is not passed to the customer, then the vendor will be held accountable to pay any future disputed liability along with interest, fine, penalty, litigation cost etc. (c ) Vigilant to Govt announcements : The anti-profiteering provisions in the GST is not elaborative , leaving enough room for misperceptions and perplexities. While the steps mentioned above can help the company prepare for business conducted in the future, there are several questions such as how to change MRPs if products are already at the retail store, Is compliance mandatory even if the product is covered under drug pricing control order etc. still need clarifications. For questions such as these, taxpayers need to be vigilant to announcements from the government on the topic and plan their processes accordingly. (d) System & Processes : Anti-profiteering brings in a dynamic situation for businesses where, every time there occurs a reduction in GST rates or enhancement in credit pool, the benefit needs to be passed on to consumers. Therefore, every change in prices is expected to be backed by data, documentation providing the formulas, workings, backups etc. explaining the rationale of such price increase. Towards this, the companies should gear up their systems and processes to deal with the requirements of antiprofiteering on a go forward basis. (e) Advance Ruling :Anti-profiteering is likely to be an area where policy and practice will continue to develop but in the interim it important to develop and implement a plan to comply with the law. As some of these clarifications may emerge in due course, industry may also think of taking advance ruling on critical issues. (f) Articulate Methodology Articulate and evidence the methodology adopted in calculating and deploying the GST benefit Maintaining relevant commercial documentation updated to reflect GST benefits, particularly service contracts and pricing schedules (g) Documentations :Other documentation to be maintained as adequate to support and evidence compliance with law 10. Anti-profiteering measures need to be consistently followed as it is not a one-time activity since the law, rates keep changing This Article has been written by CA Anita Bhadra. She can be contacted at [email protected]