Anti Profiteering Provision mandates the manufacturer and others in the supply chain to pass on the benefits arising during the transition phase from current tax regime to GST regime, to the consumers.
On 22 April 2017, the Centre and states agreed on the broad contours of two crucial GST bills: the draft Central GST Bill and the draft Integrated GST bill. The Central GST law, as passed by the Parliament, contains the anti-profiteering clause.
Globally, Australia is said to be the first country to introduce an anti-profiteering provision during GST introduction in the year 2000, followed by Malaysia in the year 2015. Though there are no empirical studies to prove its benefits, the Government appears to be inclined to experiment with these provisions in India as well.
The provision in the Central GST Act – Section 171, mandates that benefits arising due to either lower tax rates or more tax 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 of anti-profiteering provisions. Therefore, it is of paramount importance for companies to set up processes to compute the likely benefits and have a plan to ensure smooth passage of the benefits to the consumer.
1. Computing Benefits due to Lower Tax Rates and Increased Credits
Taxpayers can compute the likely benefit at a broader level. The provision categorizes the likely benefits in two baskets:
a) More input tax credits becoming available
Central Sales Tax (CST) was a cost in the supply chain, while in GST regime there is no CST. This is construed as a benefit arising due to transition to GST. Earleir service providers could not claim credit of VAT paid on goods, and traders could not claim credit of excise/ countervailing duty and service tax. However, now these credits accrue to a taxpayer. Taxpayer needs to identify these benefits arising on account of transition to GST at organizational level.
Tax benefits can also be computed at the product level based on a cost sheet.
b) Reduction in tax rates
Once benefits arising from credit are captured, the next step is to compute benefits from rate reduction, if any. This benefit may be computed at the product level.
Say, for example, one unit of toothpaste of Rs. 10 attracted excise and VAT of Rs 3 earlier. If GST payable on toothpaste is Rs. 2, then Rs. 1 is the likely benefit.
2. Looping in Vendors / Supply Chain
While the above steps provide clarity in understanding how much benefit is arising at the manufacturing level, the company also has to ensure that their vendors pass on the benefits by way of price reduction. To do this, the company needs to get cost data from vendors. Once details are shared by vendors, their veracity is to be verified by the company or through an independent firm. In case vendors are not willing to share details, some sample cost sheets can be prepared based on industry knowledge. The expected amount of benefits thus arrived at could be shared with vendors for confirmation and used for negotiation.
To ensure that vendors comply with the company’s requests, it is advisable to add an appropriate anti-profiteering clause in the vendor agreement stating that the vendor agrees to comply with anti-profiteering provisions and to share authentic and verified data to ensure that the benefit is appropriately passed on in accordance with the provisions. Going a step further, the clause can also state that in case an appropriate benefit is not passed to the customer, then the vendor will be held accountable to pay any future disputed liability along with interest, fine, penalty, litigation cost etc.
Read more about Vendor Compliance here.
3. Preparing for the Unknown
The anti-profiteering provisions in the GST bill are very brief, leaving enough room for misperceptions and perplexities. While the two steps mentioned above can help the companies prepare for business conducted taxpayers need to be vigilant to announcements from the government on the topic and plan their processes accordingly.
If you have any questions or would like to know how IRIS GST can help you, please write to firstname.lastname@example.org.