Summary: Retailers Association of India (RAI) and Deloitte collaborate to explore how anti-profiteering legislation under GST will impact retailers. Excerpts from a joint report are presented below.

Goods & Services Tax (GST) in India is a momentous step towards reducing the cascading impact of taxation across the supply chain. To ensure that no supplier or any other link in the chain profits unjustifiably because of GST, the government has introduced an Anti-Profiteering legislation under the law. It impacts every brand and every retailer in the system. It is an important law which would be pursued vigorously by the concerned authorities. However, there’s not enough knowledge available in the market about it.

Anti-profiteering under GST

The anti-profiteering provisions are designed to protect consumers by restricting companies from benefiting unjustly on account of any reduction in GST rates or enhancement in tax credit pool.

Key requirements in India

The Central GST Act, 2017 imposes obligation upon taxpayers to reduce the prices in following manner:

• General obligation: Any benefit due to tax rate changes or enhanced input tax credit to be passed on to customers by reducing prices of products. The relevant provisions are mentioned under Section 171 of the Central GST Act.

• Specific obligation: Any tax credits claimed on transition stock (deemed credit under 40/60% scheme) should be passed on to customers. The relevant provisions are mentioned under Section 140 (3) of Central GST Act.

Compliances

To ensure compliance, a National Anti-Profiteering Authority and state level screening committees have been formed to review complaints of anti-profiteering. The Director General of Safeguards handles detailed investigation of cases.

Non-compliance with anti-profiteering measures may entail severe penal consequences under the GST law. The authorities may order the defaulter to reduce the prices of supplies to ensure that the benefit of tax rate cuts or enhanced credits is passed on to the customer. While the penalties can also be levied as provided under the law, the taxpayer may be ordered to return the amount of benefit not passed to the customer along with applicable interest. In extreme cases, the registration of the taxpayer may be cancelled. Failure to address anti- profiteering related requirements in any manner may affect consumer confidence as well as impact the company’s reputation.

What else do we know?

1. Anti-profiteering applies to both goods and services

2. All channel partners are impacted (brand owners, distributors, exclusive retailers etc.)

3. Both MRP and non-MRP based product lines are within ambit

4. Anti-profiteering is not a onetime activity since the law, rates keep changing

Open issues

Anti-profiteering brings in a dynamic situation for businesses where, every time there occurs a reduction in GST rates or enhancement in credit pool, the benefit needs to be passed on to consumers. Therefore, every price change is expected to be backed by data, documentation providing the formulas and workings explaining the rationale behind the hike.

Companies should prepare their systems and processes to deal with the requirements of anti–profiteering on a go forward basis. Having said this, anti-profiteering should not be viewed as a price regulation imposed on companies preventing them from usual price increases, which may be on account of past trends, increase in costs or enhanced margins.

There is limited guidance available on the methodology to be applied to compute the “commensurate benefit” to be passed to the customers. Unlike other countries, the anti profiteering authority has not mandated a specific calculation or methodology.

It is only fair to say that every company while determining its pricing strategy is determined by competitive forces. The pricing decisions differ amongst sectors, product lines, SKUs, business segments etc.

At the least, keeping in mind that pricing is never a straight forward decision, below are some points worth considering in looking at the application of anti-profiteering provisions:

• At what profit indicator level should the anti-profiteering computation be made – at product/ segment/business vertical/ company. It should be considered that within different product lines, there are certain SKUs which exist. Also, while there may be profits in one product line, there may be losses in others. Furthermore, the same product may be marketed differently to different class of people
  
  
• While the brands in most cases set the prices, the sale is made through independent distributors, wholesalers, retailers and stockists. Therefore, what is the beginning and end of the responsibility of the company?
  
  
• The law is unclear as to the duration within which the benefit arising out of reduction in GST rates or enhancement in credit pool is to be passed on to the customers. It would, however, be unfair to expect the pricing changes to be effected immediately after a legislative change as pricing is an interplay of multiple factors. Companies should be allowed a fair duration over which the benefit has to be passed on rather than a specific date.
  
  
• Many companies in commodities and trade have market forces based pricing model. Therefore, it is not clear how anti profiteering is going to impact the prices in these cases.
  
  
• There may be external cases determining the price, for instance for drugs, medicines where other acts/ regulations have a significant interplay in the pricing of the products.Therefore, the impact of anti-profiteering has to be seen specific to these cases as well.
  
  
• While significant costs have been incurred on GST implementation, would the same be considered?

 
Retail specific issues

• Retail typically has a long supply chain. There is usually one to two months of inventory in the pipeline. Hence, it would only be prudent to have a time duration specified under law/ guidelines, to take corrective actions on account of change in rates.
  
  
• The retail sector is also required to comply with Legal Metrology Act and Rules made thereunder, where the standard sizes for certain specifically in cases where strategic pricing is adopted (for instance, Rs 5, Rs 9.99). In cases of strategic pricing, any change in rates may result in absurd pricing, which may not be trade-friendly (for instance  , Rs 9.55) interrupting the transaction.
  
  

• It would be useful to consider making applications through industry bodies to the extent possible so that specific guidelines dealing with industry specific concerns may be issued. Industry based forums should be approached to resolve issues unique to each industry.
  
  

What next?

Anti-profiteering is likely to be an area where policy and practice will continue to develop. In the interim, it is important to develop and implement a plan to comply with the law. As some of these clarifications may emerge in due course, the industry may also think of taking advance ruling on critical issues.

In the meanwhile, the following may be done:

• Articulate and evidence the methodology adopted in calculating and deploying the GST benefit
  
  
• Maintaining relevant commercial documentation updated to reflect GST benefits, particularly service contracts and pricing schedules
  
  
• Other documentation to be maintained as adequate to support and evidence compliance with law.

Article source: STOrai Magazine 

Excerpted from the report ‘Emerging Issues on Anti-Profiteering under India GST’ by RAI in partnership with Deloitte. Anil Talreja, Bela Sheth Mao, Rajeev Dimri, Parul Anand, Sheena Sareen, Himanshu Gupta are contributors.

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