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



THE INTRODUCTION:

The following companies approached us, to ensure the compliance of 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 5 production facilities. The company has a strong 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 7 manufacturing facilities and employs ~6000 people, serving millions of customers

  • A listed PSU with significant presence in 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 of 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]. The memorandum read that the benefits to the suppliers of the PSU due to increase in the input tax credit on account of inter-vertical credits to be availed by the PSU through renegotiating and revising their contracts with the vendors and bringing their offer price down commensurately.



THE SOLUTION:

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


Areas

​Methodology

Benefit of input tax credit

  • A thorough assessment was performed by the companies to work out the impact of Cenvat/ Input tax credit under the erstwhile tax laws as well as new provisions of the GST Act

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

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

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

  • The impact of inflation and discount were 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; along with their impact on cost and tax structures; was also taken into account.

  • Price point determination is a complex process which is 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 was derived from cost database and sales register. Per Unit (Numbers) changes in the ASP (Average Sales Price), GM (Gross Margin) and NM (Net Margin) pre and post GST was 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 advent of GST was determined and analyzed

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

  • A detailed analysis (collating data from external and internal sources, as well as data available in 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, conclusions were drawn about the scope of further vendors’ negotiations, if required.

  • Meticulous calculation of discounts with respect to purchase requisitions/orders, based on the study conducted as well as on the further vendor negotiations performed.

  • Examination of undertakings (if any) from vendors along with the certificates issued from 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 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”

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


INTERNATIONAL PERSPECTIVE:

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


In Australia, GST implementation had a three-year transition period starting from 1 July 1999 to 30 June 2002. During this period, the Australian Competition and Consumer Commission had to oversee pricing responses to GST and was also entrusted with the responsibility to act against businesses whose price changes were not in tandem with the GST rate changes.

The country followed “one dollar" methodology, where a dollar worth 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, in an attempt to check price exploitation, large corporates with revenue exceeding $100 million (around Rs645 crore) 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 the consumer complaints.

In Malaysia, the net profit margin methodology was adopted. An anti-profiteering rules was set up wherein net profit margin as on 1 January 2015 was used as a benchmark to gauge whether benefits have been passed on or not. While this worked well in sectors like retail, food and beverages, the overall impact was not very significant. Both countries followed different methodologies, but anti-profiteering failed to yield the desired results. Such provision can work only when things like raw material costs do not swing sharply. There are many such variables and they would differ from one company to another, adding to the implementation challenge.



 

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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