The following companies approached us to ensure compliance with their anti-profiteering provisions  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.
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  . 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 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:
Benefit of input tax credit
Reduction of output tax rates
Detailed evaluation of productwise (SKU/ Brand-wise) cost statements
Detailed evaluation of vendor agreements, contracts, negotiations, etc.
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:
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
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.
FREQUENTLY ASKED QUESTIONS:
What is GST?
GST stands for Goods and Services Tax. It is a unified tax system that replaces multiple indirect taxes levied by the central and state governments in India. GST was implemented on July 1, 2017.
What is anti-profiteering under GST?
Anti-profiteering under GST refers to a mechanism that prevents businesses from taking undue advantage of the new tax system and passing on the benefits of reduced tax rates or input tax credits to customers. The aim is to ensure that businesses reduce the prices of their goods and services in proportion to the reduction in taxes paid.
What is profiteering under GST?
Profiteering under GST refers to the act of businesses taking advantage of the new tax system and increasing their profits by not passing on the benefits of reduced tax rates or input tax credits to customers. This leads to an increase in the prices of goods and services, which is detrimental to the end consumers.
What are the penalties for non-compliance with anti-profiteering under GST?
If a business is found guilty of non-compliance with anti-profiteering under GST, it can be penalised in the following ways:
Reversal of the undue benefit availed by the business
Imposition of a penalty of up to 10% of the profiteered amount
Cancellation of the business's GST registration
How can businesses comply with anti-profiteering under GST?
Businesses can comply with anti-profiteering under GST by:
Reducing the prices of their goods and services in proportion to the reduction in taxes paid
Passing on the benefits of input tax credits to customers by reducing prices or providing additional benefits
Ensuring that their pricing policies are transparent and clearly communicate the impact of GST on prices
Regularly reviewing their pricing policies to ensure compliance with anti-profiteering rules
Can businesses still make a profit under GST?
Yes, businesses can still make a profit under GST. The aim of anti-profiteering under GST is to ensure that companies do not take undue advantage of the new tax system and pass on the benefits of reduced taxes to customers. However, businesses can set their prices based on market conditions and demand.
Reach us if you have any concerns regarding cost management accounting issues in your organization.
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: email@example.com
Tel: +91-8800018190, +91-7503703599.