GST and anti-profiteering: Industry must pass on benefit to consumers, but authorities too must take a big step – The Financial Express–09.01.2018

In a letter to large FMCG companies, the chairperson of the CBEC pointed out that in addition to these measures being a legal requirement, industry has a ‘social obligation’ to pass on this benefit to consumers.

Anti-profiteering provisions under GST have been one of the most hotly debated topics recently. This debate has gained momentum after the steep GST rate cut from 28% to 18% on over 175 items from mid-November. In a letter to large FMCG companies, the chairperson of the CBEC pointed out that in addition to these measures being a legal requirement, industry has a ‘social obligation’ to pass on this benefit to consumers. This seems a legitimate expectation as far as the government is concerned. However, the critics of the policy view this as an attempt to regulate the prices, which has no place in a free economy. Market forces, they say, will ensure that prices are competitive and benefits are passed on. Industry, on the other hand, believes that while the government’s intention cannot be questioned, it is practically extremely difficult to take complex pricing decisions immediately upon the rate change. Moreover, in absence of detailed guidelines on the manner in which the benefit should be passed on, businesses are not clear as to how do they establish that they have not profiteered from GST.

Not surprising that this ‘trust deficit’ is now getting ministered in conflict on the ground. Recently, the director-general (safeguards) issued notices to five companies initiating an anti-profiteering investigation. These notices were triggered after reference was received from the Standing Committee which has been set up to receive the consumer complaint and carry out a prima facie enquiry.

The DG’s office has indicated that they have received around 200 complaints already but have been quite careful in selecting the cases for investigation. Notices have been issued to dealers of cosmetic products and automobile, a large food-service chain and a real estate company. It, therefore, covers a wide spectrum of industry and it is likely that these are the sectors which will continue to get more attention, from the consumers as well as the government, over next few months.

It is good to see that where a consumer’s complaint is against a particular supplier, the authorities have refrained to include the company actually manufacturing the product or the brand-owners, though there were some indications earlier that the government may hold these companies accountable for prices at wholesale and retail level. It is important because, for the stock already in trade, these companies may not be able to do much in case of GST rate-cut, other than ‘nudging’ the wholesalers/retailers to pass on the benefit to the consumers.

A quick glance at these notices (available on DG’s website) gives an insight as to where the authorities are getting to. However, it also raises many other questions, with no real answers. To start with, it is not clear as to the procedure adopted by the Standing Committee in conducting the preliminary enquiry and was any opportunity provided to the companies to explain their stand. For instance, in case of the notice issued to the real estate company, a presumption seems to have been made that the input credit available would exceed 12% GST payable. This may not be right in case of existing projects, where substantial construction has happened before GST. In such cases, the amount of additional input credit would essentially pertain to construction material purchased after July 1, 2017, whereas GST of 12% would apply also with respect to instalments due after GST but pertaining to prior period. Further, the information sought seems to be quite detailed within the limited time provided, some of which has to be certified by an accountant.

The example of the notice issued to retail company is also interesting. While the complaint is for a specific product, the information has been sought at an entity level and with respect to all their products. It would, therefore, be interesting to see whether the enquiry extends to all other products.

The other ambiguity is as to whether the benefit has to be necessarily passed on for all items (SKUs) and from the very date when the rate got reduced. For instance, the enquiry against the food-service chain is for a particular product, viz. café latte, wherein the customer found that prices remained unchanged as on November 15, when the GST rate was reduced from 18% to 5%. What if the company decided to pass on the benefit attributed to this produce by say reducing the prices of cappuccino or some other beverage instead? What if the quantity of the product got increased for the same price? What if the prices were reduced after a week? It may be noted that for restaurants, quantification of the precise impact is slightly complex due to denial of input credits, along with rate reduction.

While it is too early to comment on the direction in which these proceedings will go, it is clear that unless these issues are well thought out and addressed quickly, this could snowball into an avoidable stand-off between industry, businesses and consumers.

The only solution is to adopt the middle path. Focus on the spirit and intent of the law rather than getting caught in the mirage of technicalities. While the industry should ensure that the entire GST benefit is passed on to the consumers within a reasonable timeframe, the authorities need to appreciate the business nuances and allow companies reasonable flexibility in terms of the mechanics of passing on the benefit. There should also be deterrence for filing frivolous complaints.

Till we get there, situation would be tense but, hopefully, under control.

The author is leader (India indirect tax), PwC; Views are personal

via GST and anti-profiteering: Industry must pass on benefit to consumers, but authorities too must take a big step – The Financial Express

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