GST – A NEW ERA
India witnessed the biggest tax regime change with transition from Excise & Service tax to Goods & Services Tax (GST) w.e.f. 1st July, 2017.
The change was so dynamic that it could lead to boosting the GDP of India and also result in changes in price of goods and services as well. The business transactions saw a different trend.
A prominent change was the introduction of anti-profiteering. The intention is that no business should take undue benefit of such change in taxation regime.
The macroeconomics of pricing of goods and services are under scan for the first time in India. The focus of the Government of India is that if there is a reduction in tax, then the benefit of reduction should be passed over to the consumer.
With anti-profiteering being introduced, no business can retain any benefit or profit accrued due to reduction in tax and ultimately leading to reduction of its price of goods or services.
I can say that “unjust enrichment in profit is under curb by anti-profiteering measure”. In other words, entire supply chain is under scan of the lens.
It is also a step towards checking of inflation due to changes in pricing with the onset of new tax regime of GST.
The machinery provision to regulate anti-profiteering is under Section 171 of CGST Act which states that “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.”
On perusal of the same, it should be realized that word deployed is “recipient” and it conveys a recipient centric approach rather than a consumer specific approach.
The provision of anti-profiteering is going to safeguard the interest of every person in the supply chain as a recipient.
APPLICABILITY ON B2B OR B2C
The intent and object of the legislation can be known from the body of Section 171 itself. The context and purposive interpretation conveys everything as to with what purpose this curbing provision was enacted and what it intends to achieve by way of implementation at any given point of time.
The word i.e. “recipient” has been used in the body of Section 171 of the Act. The word “recipient” represent a broader class and can be said to include various class i.e. “customer”, “end-user”, “consumer” , “any recipient” etc.
Hence, it is as clear as day light for one to conclude as to whether the intention is B2B2C or B2B or B2C or otherwise.
PASSING OF BENEFIT
The crux of anti-profiteering is that the passing of benefit should occur with every reduction in tax rate and/or due to benefit of input tax credit.
The passing of benefit has also been implemented by other ministries to align it with declaration of every price reduction or enhancement by way of an advertisement in public domain.
The printed price on label is also being monitored. It must be noted that for the first time citizens and/or recipients have also become active to point out any or every disparity in price to the notice of the concerned authorities.
REVISIT OF EVERY CONTRACT
Every business organization needs to be extra vigil towards their existing and upcoming contracts.
It is high time when various provisions pertaining to anti-profiteering and related clauses of GST have to be factored, amended and/or included in the body of the contracts so that various unforeseen damages or liabilities can be prevented well in advance.
“AMLEGALS has had always highlighted this aspect that after GST, every contract should be holistically vetted and redrafted as lot of loopholes remains in every contract under the GST regime.”
It must be realized and noted that is not a matter of inclusion of one clause for GST in a contract but an exhaustive inclusion has to be done before it is too late after all “contracts are heart and soul of any business”
Various committees have already been working on artificial intelligence for certain sensitive sectors.
It has to be realized that the sector specific intelligence has been mobilized to check on various factors including the macro elemental aspects of pricing after change in rate slabs for various goods and services.
The reduction of prices in many sectors and statics has already been tabled and actions are being initiated at every possible level.
PRICE FIXATION Vs. BOARD MEETINGS
I am afraid to share that any half-baked information and fixation of price thereupon may lead to effect bottom line of the business in mid to long run.
Therefore, an informed, justifiable and authoritative view and guidance should be sought in deciding upon the actual compliance of the mandatory requirement of the law.
INTRINSIC & EXTRINSIC FACTORS
Determination of the Price has to be looked with price dependency on the basis of various “intrinsic factors” and “extrinsic factors” such as:
- Cost of raw material or other components.
- Predetermined objectives (Higher profit or higher revenue)
- Image of the Seller (Goodwill)
- Life cycle of the product
- Credit period offered.
- Promotional activities (Heavy advertisement/promotional exp)
Whereas, Extrinsic factors being such as:
- Consumers (price sensitivity & purchasing power of buyer)
- Government Control
- Economic Condition (Recession)
- Supply Chain (Longer the chain, higher would be the price)
- New business model
Companies should keep all factors very simple and account all the factors in very logical manner rather than behaving in panic at any given point of time. I have come across various panic driven price reductions by leading companies of India when they came to us for second opinion on anti-profiteering.
It won’t be wrong to claim that practically it is very difficult to establish one to one correlation between “ITC on inward supplies” with the “Tax payable on outward supplies”.
However, Companies as well as concerned anti-profiteering authority will have to deploy a holistic approach in screening of the margins and inbuilt factors towards the prices of supply.
A holistic approach focusing on 3 factors has to be developed:
- Profit on product in absolute terms.
- Profit percentage on Cost of product.
- Profit percentage on Sale Prices
Of late, it has been observed that companies are either not clear on anti-profiteering or they have been guided in such a manner that the intrinsic and extrinsic factors have been confused while giving effect to the new pricing system especially in board meetings that in panic, they have decided to either pass over extra benefit or are still in dilemma as to what shall be their actual pricing.
On 9th February 2018, the Finance Minister informed the Parliament that notices have been issued for ‘initiation of investigation’ in 9 cases under anti-profiteering provisions of GST.
As on 31st January 2018, 221 anti-profiteering applications have been received by the Standing Committee and State Screening Committees.
“Notices of initiation of investigation have been issued in 9 cases involving 52 applications,” Finance Minister Arun Jaitley said in a written reply. He further said that to protect the interest of consumers, the government has directed manufacturers, packers, importers of pre-packaged commodities to declare the revised retail sale price after the implementation of GST by way of stamping or putting sticker or printing.
It is further noted that till 31st March, 2018, a large number of notices have had been issued on to companies, in every sector, on anti-profiteering and this can further lead to audit as well as further complications.
The Authority can determine the methodology and procedure for the determination as to whether the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices.
On the basis of various advise and opinions given on anti-profiteering to various companies so far and coupled with our in-depth study on anti-profiteering in other parts of the world, we at AMLEGALS found that the populist reasons for existence of problems related to anti - profiteering are as below:
First –Biased Accounting,
Second - ITC mis-calculation,
Third- Faulty costing,
Fourth- Extrinsic & Intrinsic factors neglected or not properly accounted for,
Fifth – Pre & post GST pricing policy
Sixth- Lack of a System
Eight – Un-organized Process
Ninth - No Accountability
Tenth - No Review & Track
Eleventh – No IT validation
Twelfth – Big Communication Gap between inventory, finance, costing, marketing, SCM etc.
“Companies should deploy “artificial intelligence” as a priority to identify the missing link.
Overall, we saw common and logical issues were either neglected and/or not even considered and dealt properly while opting for GST implementation.”
In majority of cases, the sole reliance upon the forward manner of costing has backfired whereas backward costing was also to be understood for every correct costing by applying all extrinsic and intrinsic factors which has actually surfaced after GST.
It must be realized that the onus of passing of the benefit to the recipient will lie upon the companies who have do so at their end.
The million dollar question will still prevail as to how the authority will decide that the reduction of tax has actually being transferred or not because the price of each product differs according to the demand and supply.
The quest at the end of investigators and companies will be to find out the actual cost before GST and whether any price is increased or decreased post GST either due to ITC and/or the change in the rate of tax.
Above all, on first hand companies will have to substantiate, ensure and satisfy the authorities that suitable pass over of every decrease in prices as an after effect of GST have been given effect to and the profits earned are not due to tax arbitrage, but either as a cost plus amount or as function of prevailing market prices.
I will at the end request every business entity to take an informed decision as anti-profiteering will emerge as one of the biggest grey area in near future under the tax regime of GST.
The golden advice on anti-profiteering is that “keep your calculation simple, have proper IT validation, avoid artificial aspects and emphasis should be to find out the micro and macro factors with its effect after GST”.
The change in price should be also declared in proper manner failing which the failure of compliance will also bring new complexities.
AMLEGALS - ANANDADAY MISSHRA, FOUNDER ADVOCATE - AMLEGALS
The content is purely an academic analysis under “Legal intelligence series” and does not result into any advice to any person, including any client in any manner.
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