JULY 27, 2018

By V Sivasubramanian

THE scale of announcements and extent of concessions granted by the Goods and Services Tax (GST) Council, after its recent (28th) meeting, perhaps fall short only of a penultimate budgetary exercise before general elections. GST Council has slashed the GST rates on 177 line items of goods besides announcing several exemptions for services and procedural simplifications.

The immediate reaction one would have normally expected from the trade and industry would bea sigh of relief with happiness as the rate reduction enables them to reduce prices and thereby sell more.

But let us take a close look. As per the anti-profiteering provision under section 171 of the Central Goods and Services (CGST) Act, 2017, any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. So there is no choice not to pass on the reduction in tax to the recipient by way of commensurate reduction in prices.

What is the legally acceptable 'commensurate' reduction in the prices of these 177 line items? Rule 126 of the CGST Rules, 2017 empowers the National Anti-Profiteering Authority (NAPA) to determine the methodology and procedure by which a registered person shall pass on the reduction in rate or the benefit of input tax credit to the recipient by way of commensurate reduction in prices. However, NAPA rather appears to have understood this provision differently. The Procedure and Methodology uploaded on the website ¹ of NAPA instead specifies the procedure and methodology to be adopted by NAPA for its own internal working, for making inquiries into alleged contraventions of section 171 of the CGST Act, and for passing its orders.

So there is no procedure or methodology notified so far for use by a GST registrant to determine what is 'commensurate' reduction or as to how a GST registrant shall pass on the rate reduction or input tax credit benefits to his recipient. Does it add to the confusion or can it be argued to be a free-for-all which NAPA cannot question later on?

Let us move on to the second catch. The computation of reduction in price, if any, may not be a case of a simple straight line in several cases:

1. In cases where the product or service has been fully exempted, there will be no input tax credit available on the inputs and input services.

2. In some other cases involving only rate reduction (but still non-zero), there could be credit overflow.

3. The existing inventory may need a different treatment from that of future stocks as the scenario may vary.

4. For a trader this could be a case of procurements at higher rate and sale at lower rate as far as existing inventory is concerned though for future stock both GST rates for input and output will remain the same.

5. For a manufacturer any reduction may be possible only after factoring in the tax incidence and credit eligibility on inputs and input services.

Moreover, a GST registrant may not be able to pass on the benefit immediately given the requirement to reconfigure his internal information technology (IT) and/or other systems (and test them as well). In case of retail packs, the changes required in packaging and artwork would be an additional factor which could delay the implementation. So what happens to the interim period?

But the story is still not over. Reduction in GST rate or exemption also means a lower Integrated GST (IGST) leviable on imported like products and hence greater competition (both in quantity and price) from imports. The impact on the domestic manufacturers and suppliers being that they will need to lower their prices to remain in the game. However, a GST exemption for the final product without any change in the input GST structure will mean that the GST on the inputs and input services will become additional cost for the local manufacturer (this position also applies in cases of credit over flow where such overflow is not allowed as refund).

In the pre-GST regime, section 3(3) of the Customs Tariff Act, 1975 empowered the Central Government to levy additional customs duty to counterbalance the excise duty leviable on the raw materials, components and ingredients of the same nature as, or similar to those, used in the production or manufacture of the imported article. This power was quite rarely used but has been available on paper and is permitted under Article III (Para 2) of the General Agreement on Trade and Tariffs (GATT). However, no similar/corresponding powers to levy additional customs duty to counterbalance the GST leviable on raw materials, etc. used in the manufacture of imported articles, have been taken by the Central Government in the GST regime.

The net effect is that the domestic manufacturers of the GST exempted products may not have a choice not to price per import parity, though they may not be in a position to make a 'commensurate' reduction in their prices in view of the additional cost burden.

So let's relook at how the domestic industry should react to the slew of concessions announced recently by GST Council: Perhaps a lot more complex - isn't it?

¹Refer http://www.naa.gov.in/docs/procedure%20_methodology_18.pdf . The document is undated. It also appears there are typosin naming the Procedure & Methodology which is titled the Goods & Services Tax ( here-in-after referred to as the Authority ) Methodology and Procedure, 2018 [ Emphasis supplied].

(The author is Advocate and Executive Partner, Lakshmikumaran & Sridharan and the views are expressed are strictly personal.)