GST: Surviving the anti-profiteering gaze

When the finance minister in a media interaction after the 23rd Goods and Services Tax (GST) Council meeting ticked off restaurant owners for not passing the benefits of increased input tax credit to customers, the message to the business community was loud and clear: The government may invoke anti-profiteering measures if there is reluctance in reducing prices of goods and services that are now attracting lower tax rates.

“With 10 per cent reduction in rates on many products, there will now be increased focus on the enforcement of anti-profiteering regulations,” says M S Mani, partner-GST, Deloitte India. In many cases, the new rate of 18 per cent is much lower than the pre-GST combined indirect tax rates. “Hence, it is essential for businesses to be prepared,” he adds.

However, arriving at exact quantum of impact of any reduction in tax or benefits from input tax credit is easier said than done.  First, there is ambiguity over the method for calculating anti-profiteering. Countries such as Malaysia use net profit margin or margin per cent method for determining anti-profiteering. Australia, one of the first countries to have anti-profiteering regulations, uses the net dollar margin rule method. India has left it to the discretion of the anti-profiteering authority to arrive at the methodology.

“There is a lack of clarity over how the computations and calculations will be made — state-wise, location-wise, product-wise or on an entity basis,” says Rajat Mohan, partner, AMRG & Associates.

Determination of final reduced prices at product level is quite challenging, as common costs will need to be apportioned, say experts. For that, existing stock of inputs and finished goods, which have higher rates of tax, need to be segregated. It is also necessary to segregate input price changes from tax rate changes. 

“Since margins may not be common across trade channels, price will need to be reworked for each product through each trade channel. This will be a voluminous exercise,” says Mani. 

Experts point out that all businesses would need to have a well-structured costing mechanism. “It is better if cost of inputs, input services and capital goods can be directly attributed to goods and services supplied by such business, so that any decrease in cost of procurements can be directly passed on by proportionate reduction of prices of goods and services supplied,” says Abhishek A Rastogi, partner, Khaitan & Co.

Given the ambiguity in the law, Rastogi says businesses need to have their own set of guidelines and workings to show they have made efforts to reduce prices, after factoring in their costs and regular profit margins.  “These workings should be based on scientific assumptions,” he adds.

To ensure that one is able to defend any pricing decisions, if challenged by tax authorities, it may help to have a certificate from an independent person on the correctness of the calculation. “Maintain costing data to substantiate price reductions,” says Mani.  One also needs to ensure the retail channels pass on price reductions to consumers. Mani’s advice is to have separate communication with trade channels on price before and after any rate reduction.
 

Experts say companies should particularly keep in mind that sudden profits or unexplained gains in business after implementation of GST or a major rate reduction could spell trouble. “Immediate attempts should be made to examine reasons behind such profits or gains,” says Rastogi. 

Prices will have to be reworked to ensure there is a downward revision if there is a cost saving on procurements because of increase in credit pool or a rate change in outward supply of services, experts add. “Industry should have detailed documentary evidence ready at all times to prove anti-profiteering,” says Mohan.

While there are question marks over infrastructure or manpower at disposal of the government, to enforce concepts like anti-profiteering, many experts fear, going forward, the exercise might become largely bureaucratic.  

How the provisions work

Under GST, the suppliers of goods and services must pass on any reduction in rate of tax or the benefit of input tax credit to consumers by way of commensurate reduction in prices. If this is not done, the consumer's interest is protected by the National Anti-profiteering Authority, which may order:

— Reduction in prices

— Return of the amount not passed on, with 18% interest to the recipient

— Imposition of penalty

— Cancellation of registration of the supplier

Affected consumers may file an application, in a prescribed format, before the Standing Committee on anti-profiteering if the profiteering has all-India character or before the State Screening Committees if the profiteering is of local nature.

Issues & challenges

The anti-profiteering rules contain the bare essentials of a statute for determination of alleged anti-profiteering by the anti-profiteering authority 

— No methodology or procedure prescribed in either the CGST Act or the rules to determine profiteering by the supplier

— Left at the discretion of the authority

— Lack of clarity over whether the computations and calculations would be made state-wise, location-wise, product-wise or at entity-level

How others have tackled the issue

Australia

Follows the net dollar margin rule method i.e. if taxes and costs fell $1, then prices should also drop by at least $1.

Malaysia 

Has recently shifted from the net profit margin method to the mark-up per cent or margin per cent method

Source: AMRG & Associates