Kapil Joshi

Basics:

Revised Model Goods and Service Tax Law (MGL) has been released in November 2016 after taking into account various representation made by the stake-holders. Changes made include capping of tax rates, simplification of Job-work related procedure, excluding of Government subsidies from the definition of consideration etc.

The revised MGL do have something for the consumers as well. Revised MGL introduced anti-profiteering measures (Section 163) to ensure that following benefit on account of implementation of GST is passed on to the consumers:

– Benefit on account of input tax credits, which will be available on almost all goods/services used as inputs.

– Benefit on account of reduction in the rate of taxes.

Above effectively means that the reduction in price of goods/service should commensurate with the reduction in tax cost on account of introduction of GST. Further the transition provision of the revised MGL (section 169) proposes to allow credit of duties and taxes in respect of inputs held in stock subject to the condition of passing the benefit to the consumer.

Need for Anti-profiteering Measures:

Countries like Australia, Malaysia and New Zealand have witnessed increase in inflation after implementation of GST. Increase in prices was mainly attributed to unwillingness on the part of supply chain participants to pass on the benefit as well as perceived uncertainty on account of new tax regime. Learning from the experience of these countries India decided to implement anti-profiteering measures to ensure that benefits of an efficient tax system are passed on the consumers.

Indian authorities are looking extra cautious as approximately 50% of the items in the Consumer Price Index (CPI) are proposed to be exempted for proposed GST and most of the balance items are proposed to be taxed at the lower rate.

Anti-profiteering laws were also enacted in other countries like Australia as well as Malaysia.

How will it operate?

In Australia the authority constituted was empowered to conduct price surveillance, monitoring and enquiry to ensure that the price reduction is justified.

In Malaysia the existing law was amended to check the net profit margin earned on various goods/services pre and post GST. In case of increase the supplier is called upon to justify such change.

In Indian context the revised MGL provides that Central Government will entrust an Authority to examine whether or not the benefit of additional ITC or reduction in the tax rate or both have actually resulted in a commensurate reduction in the price of the goods/services. The functions and powers of the authority including power to levy penalty will be prescribed.

Only time will tell, how much practical will it be for businesses to have one-to-one correlation between procurement and supply of goods/services particularly with respect to common input services for big conglomerate.

What is expected from the supplier (seller)?

  • A supplier is under an obligation to ascertain the reduction in the cost of goods/service due to availability of ITC and reduction in tax rates in GST regime and accordingly the price of the goods/service should be adjusted to pass the benefit to the consumer.
  • Reduction in cost due to additional ITC will generally be on account of following:
    • Availability of credit on capital goods installed at places other than manufacturing units.
    • Availability of credit on inputs (except certain inputs) whether used in the factory of manufacturing or not.
    • Availability of credit on various inputs services (except certain input services) which were not available previously.

Above ITC can be at various levels viz. manufacturing level, depot level or at the retail level.

  • Reduction in cost due to reduction in tax rates will be very apparent from the duty liability statement of suppliers.

What a buyer should do?

One side of the coin was supplier’s obligation to pass on the GST benefit to the consumer and the other side is about buyer. Whether this anti-profiteering Law gives buyers a statutory right to renegotiate and secure the benefits endowed by GST law? Not much is known about this based on data available in public and only time will tell what are the rights of the buyer.

It is expected that MGL on anti-profiteering will trigger renegotiations with vendors to secure price concession on account of GST implementation accruing to the vendor but whether not initiating a negotiation with vendors be deemed as not taking prudent efforts by the supplier for passing on the benefit?  Let’s wait together for an answer but what generally matters is the capability to demonstrate that a reasonable efforts has been put in to ensure that the benefits are passed on to the consumer.

Conclusion:

In view of the anti-profiteering measures being introduced in MGL, suppliers should map all transactions to compare cost variance (goods/services wise) on account of change in tax regime which include items like ITC, output tax liability etc. Other factors such as inflation, fluctuations in the cost raw material excluding taxes, currency fluctuations etc. may also be considered. This will enable suppliers to demonstrate the reason for change in price/margins of goods/services. Suppliers should be extra cautions as anti-profiteering laws may lead to inspector raj. Further buyers should also try to renegotiate the contracts to capture the benefit on account of GST.

[Views expressed in this article are based on Model Goods and Service Tax Law. Further views are author’s own and do not reflect the views of the organization.]

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