Time to flesh out anti-profiteering clause

Guidelines are needed to explain how, under GST, costs are reduced for the taxpayers

With each passing day India is marching towards Goods and Services Tax (GST), which is slated for introduction from July 1, 2017. Whilst taxpayers await clarity on multiple provisions and rules, the ‘anti-profiteering’ provision has been at the forefront of taxpayer worries.

The anti-profiteering provision seeks to ensure that the benefits arising during the transition phase from current tax regime to GST regime are passed on to the consumers.

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 2015. Though there are no empirical studies to prove its benefits, the government appears to be inclined to experiment with these provisions in India.

The precisely 10-linelong section 171 of the Central GST Act mandates that benefits arising due to rate reduction and more credits being available in the GST regime should be passed on to the consumer by way of commensurate reduction in prices.

This section also empowers the Government to constitute an authority or entrust an existing authority to ensure compliance with anti-profiteering provisions. Thus, it’s essential to compute the likely benefit and have a step-plan ready to pass on the same to the consumer.

Computing the benefits

Though, at present, guidelines to compute the benefits are not prescribed, still, at a broad level, the taxpayer can compute the likely benefits that arise. The anti-profiteering provision categorises the likely benefits in two baskets: one, more input tax credits becoming available and second, reduction in tax rates.

Let’s take a look first at the likely benefits expected to arise from the input tax credits perspective.

Atpresent, central sales tax is a cost in the supply chain and in GST there will be no CST. This could be construed as a benefit arising due to transition to GST. Similarly, the types of benefits expected to accrue to a taxpayer, being a manufacturer or trader or service provider, should be computed.

The taxpayer should identify the aforesaid benefits arising on account of transition to GST at an organisational level. Further, on the basis of cost sheet, even tax benefits may also be computed at the product level.

Once the 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 product level. Say, for example, a toothpaste tube of ₹10 at present attracts excise and vat of ₹3 and in GST regime the tax payable on toothpaste is, say, ₹2, then ₹1 would be the likely benefit. While such an exercise will help clarify how much benefit arises at the organisational level, the business will also have to ensure that its vendors also pass on the benefits by way of price reduction.

In this regard, for computing these details, the business entity will be required to obtain the cost data from vendors. In case details are shared by the vendors, then the veracity of the details shared could be internally verified by the company or through another independent firm.

However, in case details are not shared by the vendors, then, based on industry knowledge, a few sample cost sheets may be prepared. The expected amount of benefits thus arrived at could be shared with vendors for confirmation and used for the purposes of negotiation.

From a contracts perspective, it is advisable to add appropriate anti-profiteering clause in the agreements with the vendor wherein the clause may state that the vendor agrees to comply with anti-profiteering provisions and agrees to share authentic and verified data to ensure that the benefit is appropriately passed on to the company in accordance with anti-profiteering provisions.

Going a step further, the clause can state that in case appropriate benefit is not passed on, then the vendor will be liable to pay any future disputed liability along with interest, fine, penalty, litigation cost, etc.

It is pertinent to note that the anti-profiteering provisions are very brief and thus have invoked multiple questions such as how to change MRPs if the products are already at the retailer store, whether compliance will be mandatory even if the product is covered under drug pricing control order, etc.

So, to ensure that the anti-profiteering provisions are not perceived as ‘anti-industry,’ the government needs to issue detailed guidelines so that industry-specific challenges are appropriately addressed.

The writer is a Pune-based Chartered Accountant

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