JUNE 26, 2018

By Pritam Mahure, CA

WHILE we gear up to celebrate the first anniversary of the Good and Simple Tax, clarity about 'anti-profiteering' provision has been at the forefront of taxpayers' worries. Although anti-profiteering provisions were introduced with an intention of benefiting the consumer, the question is whether the intent was successful?

Lets decode.

What are the legal provisions?

Central GST Act, 2017 contains an anti-profiteering clause (section 171) that mandates manufacturers and others in the supply chain to pass on the benefits,due to rate reduction and more credits being available in GST regime, to the consumer by way of commensurate reduction in prices. It is pertinent to note that Section 171 is just 10 lines long!

Section 171 of CGST Act also empowers the Government to constitute an authority or entrust an existing authority to ensure compliance of anti-profiteering provisions.

What is the role of the Authority?

In accordance with aforesaid provisions, National Anti-Profiteering Authority (NAPA)was constituted. NAPA has authority to ask details, order price reduction and even levy penalty or cancel GST registration (refer Rule 127 of CGST Rules, 2017). A s per recent news reports, NAPA has started questioning the taxpayers about the passing of benefit in accordance with the provisions.

Any global precedence on anti-profiteering provision?

Globally, Australia is said to be the first country to introduce anti-profiteering provisions during GST introduction in the year 2000, followed by Malaysia in the year 2015. At present, Malaysia, may not be considered as an acceptable source of reference as it has withdrawn its GST from 1 June 2018 and substituted it with erstwhile Sales and Service Tax.

Any guidance available on computation of anti-profiteering benefits?

For computation of anti-profiteering benefits, its pertinent to note that no specific guidance is made available by the Government except few Press Releases (PR)issued last year by Central Board of Indirect Taxes and Customs ('CBIC'). These PRs highlight the likely industry/product-wise benefits (for products like cement, medicaments etc. and two services telecom and entertainment). The challenge with these PRs is that whilst they highlight few benefits arising in GST regime, being just a one or two pager, they end up being high level analysis than reliable documents.

How to compute impact of Anti-profiteering' provision'?

Although, at present, guidelines to compute the benefits are not made available, still the taxpayer is expected to compute the likely benefit and pass on the same. In this regard, lets understand the practical stumbling block for the taxpayers.

Anti-profiteering provision categories the benefits in two baskets, one, additional input tax credits becoming available in GST regime and second, reduction in tax rates, if any. First, lets understand which are the benefits expected to arise from input tax credits perspective. Pre-GST regime, Central Sales Tax was a cost in the supply chain and in GST, there isn't CST. This could be construed as a benefit arising due to transition to GST. Similarly, all additional credits, which are expected to accrue to a taxpayer,being manufacturer or trader or service provider, need to be computed and passed on to the consumer.

The inherent challenge is how to compute benefits from GST rate reduction, if any i.e. whether the benefit should be computed at product level or organization level. For example, what should a manufacturer of say soap and shampoo do, if more credits are available in one product (say shampoo) and lesser credits in another product (say soap). Should only the net benefits be passed on to the consumer or product-wise benefits should be passed (without netting off)? Also, can the benefit be passed on to the consumer by giving free additional quantity of goods (say 110 gm for the price of 100 gm)?

Further, whether the cost incurred due to GST introduction such as additional cost for IT implementation, additional manpower, training, compliance, ASP/ GSP etc. should be deducted to compute net benefit? Additionally, what if the Company was in loss before GST then should it continue the loss post GST as well?

For service providers, computation of anti-profiteering benefit is bigger challenge as for service industry it is difficult to determine service level benefits and pass on the same (as unlike products, prices of services may differ customer-wise).

Should the benefits arising to vendor also be passed on?

Another question that arises is whether the businesses are expected to pass on the entire benefit which the business eco-system has gained in GST i.e. whether the taxpayer is also required to ensure that the vendors pass on the benefits by way of price reduction to him so that he can pass it on onwards to consumer?

This is another million-dollar question on which anti-profiteering provisions are silent (like other aspects!). Thus, even now, it's a mystery as to whether the taxpayer is required to compute the benefits available at the vendor level and then pass on the gross benefit (i.e. arising at the taxpayer level plus benefits passed on by the vendors) to the customer.

Further, whether the benefit should be computed for Tier-I vendors, Tier-II (i.e. vendors vendor) and Tier-III (i.e. vendors vendor's vendor) as well? If the intention of the anti-profiteering provision is so then the question is how are taxpayers expected to obtain cost data from vendors? The ability of the taxpayer, to get data from suppliers is limited if not missing, as anti-profiteering provisions do not empower the taxpayers for the same. Further, even if few vendors share their data, how can the veracity of the details shared by vendor could be verified by the Company? Whether the taxpayer is expected to carry out an audit of their vendors for the same or obtain a certificate from vendors statutory/ internal auditors? The Missing clarity on these aspects is another stumbling block.

Whether it is expected that the manufacturer should also ensure compliance through his distributors?

One of the biggest practical challenges of anti-profiteering provision was how to ensure that the benefit of price reduction actually reaches the consumer. This is particularly true in case of B2C (i.e. business to consumer) segment. The challenge is, in case there is any price reduction in view of anti-profiteering provisions, how amanufacturer of say medicine could ensure that the prices of the medicines on the shelf of his distributor are actually sold at a reduced price to the consumer.

Way forward

It can be observed that the anti-profiteering provision has failed short of explaining the methodology to compute the benefit, leaving everything to the imagination of taxpayers/consultants and discretion of authorities. However, with the approaching anniversary of GST, the hopes are still high that the Government issues detailed guidelines to enable the industry to self-assess whether they are anti-profiteering compliant or not.

Incidentally, as per rule 137 of the CGST Rules, 2017, the National Anti-profiteering Authority shall cease to exist after the expiry of two years from the date on which the Chairman enters upon his office unless the Council recommends otherwise.

(The Author is a Chartered Accountant and has written books on VAT and GST. The views are strictly personal.)