In the era of GST, do we comply with anti-profiteering and not with profiteering?



THE INTRODUCTION:

The following companies approached us to ensure compliance with their anti-profiteering provisions [1] under the Central Goods and Services Tax Act, 2017:

  • A listed paints and coatings company that employs ~1500 people across its five production facilities. The company has a robust PAN India distribution network of ~20,000 dealers and 52 sales depots.

  • The Company manufactures and markets inverters, UPS systems, batteries, fans, lighting, switches, wires, renewable energy products and other commercial applications. It has seven manufacturing facilities and employs ~6000 people, serving millions of customers.

  • A listed PSU with a significant presence in the natural gas sector.



THE PROBLEM:

Post the GST era, the prices of all commodities underwent significant change throughout the country. Naturally, the products portfolio of the companies in question also were subjected to similar constraints and had to price their products based on the market scenario and competition. The companies wanted to scrutinize each and every aspect of their value chain and ensure that the new pricing was within the ambit of the anti-profiteering provisions of the GST Act.


Examining three-year trends (comprising of the pre-and post-GST regime) in the following areas:

  • Increase in the input tax credit due to availability of inter-vertical credits (implying review of purchase orders, service orders, price fluctuations, discounts, etc.)

  • Reduction of output tax rates (foretelling us a detailed analysis of the sales orders, product pricing, etc.)

  • Detailed evaluation of product-wise (SKU/ Brand-wise) cost statements

  • Detailed evaluation of vendor agreements, contracts, negotiations, etc.


Moreover, the Ministry of Heavy Industries and Public Enterprises issued an office memorandum dated 3rd November 2020 and sent to Chief Executives of all PSEs (vide email dated 4th November 2020), giving reference to the DO Letter dated 26th October 2020 of Chairman of Anti-Profiteering Authority for information and compliance by CPSEs. This mandated the PSU mentioned above to give effect to anti-profiteering provisions as provided in section 171 [1] . Furthermore, the memorandum read that input tax credit benefits on inter-vertical credits to PSU suppliers were to be passed on to the PSUs. This would be achieved through renegotiating and revising contracts with PSU vendors and bringing down their offer price commensurately with the benefit received.



THE SOLUTION:

The companies sought analysis/ insights/ evidence that proves that the post-GST pricing of their products is not only compliant with the anti-profiteering provisions but is also in harmony with the price point for the market/ industry. Chandra Wadhwa & Company’s learnings from these assignments have been structured below:


Areas

​Methodology

Benefit of input tax credit

  • The companies performed a thorough assessment to determine the impact of Cenvat/ Input tax credit under the erstwhile tax laws and new provisions of the GST Act.

  • Conducted unit-wise assessment to quantify the impact of different indirect tax regimes (pre and post-GST) in other states.

  • The benefit of inter-vertical credits was taken into consideration.

  • Undertook to purchase analysis, including capital expenditure, revenue expenditure, and other spending patterns (on goods and services) and the tax impact during the GST transition period.

  • The impact of inflation and discount was also deliberated upon while analysing the cost impact.

Reduction of output tax rates

  • GST tax liability on finished products (SKU-wise) was compared with the output tax rates applicable under the earlier tax regime.

  • The various distribution channels – online/ offline, inter and intra-state transfers, and their impact on cost and tax structures; were also considered.

  • Price point determination is a complex process not necessarily based on taxes; accordingly, relevant justification was identified/ required for changing price points (like cost, inflation, discounts, promotional offers, demand, etc.) irrespective of changes in taxation rates.

Detailed evaluation of productwise (SKU/ Brand-wise) cost statements

  • SKU-wise product costs and revenue were derived from the cost database and sales register. In addition, per Unit (Numbers), changes in the ASP (Average Sales Price), GM (Gross Margin) and NM (Net Margin) pre and post-GST were also computed.

  • The net impact of tax benefit/loss due to increase/ decrease in tax credits and liabilities was identified, SKU/ brand-wise.

  • % change in average selling price, % change in costs and % change in tax savings/ tax increase due to the advent of GST was determined and analysed.


Detailed evaluation of vendor agreements, contracts, negotiations, etc.

  • A detailed analysis (collating data from external and internal sources, as well as data available in the public domain) of the relevant vendors and industry was performed in consonance with the C&P department of the PSU in question. Based on the review, if required, conclusions were drawn about the scope of further vendors’ negotiations.

  • Meticulous calculation of discounts concerning purchase requisitions/ orders, based on the study conducted and further vendor negotiations performed.

  • Examination of undertakings (if any) from vendors and certificates issued by their statutory auditors validated the discounts offered.



THE RESULTS:

After rigorous deliberations and continuous collaboration with the respective clients for over a period of five months, our team at Chandra Wadhwa & Co. implemented a detailed oriented anti-profiteering documentation, which presented the following facts:




FOOTNOTES:


1. About Anti Profiteering Provision:

Anti-profiteering Measure: - Relevant Extract of Section 171 of CGST Act, 2017.

“Any reduction in the tax rate on any supply of goods or services or the benefit of the input tax credit shall be passed on to the recipient by a commensurate reduction in prices.”

Section 171(1) craves for the following two benefits to be passed on to the end consumer:
• Reduction of Tax Rate in New Tax Regime
• Benefit of Input Tax Credit


INTERNATIONAL PERSPECTIVE:

Some countries where anti-profiteering arrangements or other similar provisions have been put in place are Australia, Malaysia, Canada and New Zealand. Australia was the first to enact these provisions in 2000, followed by Malaysia in 2015.

  • In Australia, GST implementation had a three-year transition from 1st July 1999 to 30th June 2002. During this period, the Australian Competition and Consumer Commission had to oversee pricing responses to GST. They were also responsible for acting against businesses whose price changes were not in tandem with the GST rate changes.

  • The country followed the “one dollar" methodology, where a dollar worth of savings on a product has to be passed on to the end consumer. Secondly, a pricing rule was also put in place to ensure that no price increase is more than 10%, say tax experts.

  • Apart from that, to check price exploitation, large corporates with revenue exceeding $100 million (around Rs. 800 crores) could voluntarily submit a signed statement indicating their commitment to comply with these guidelines. Also, a national GST price hotline was established to deal with consumer complaints.

  • In Malaysia, the net profit margin methodology was adopted. An anti-profiteering rule was set up wherein the net profit margin as of 1st January 2015 was used as a benchmark to gauge whether benefits have been passed on. While this worked well in sectors like retail, food and beverages, the overall impact was insignificant.


Both countries followed different methodologies, but anti-profiteering failed to yield the desired results. Moreover, such provision can work only when things like raw material costs do not swing sharply. Many such variables would differ from one company to another, adding to the implementation challenges.



 

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SANKALP WADHWA

Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)


Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in

Tel: +91-8800018190, +91-7503703599.

Website: www.cwcindia.in