Tax considerations resulting in cost saving measures, credit optimisation etc would fall under the new ‘must haves’ category vis-a-vis routine compliance and filings matters, which may not warrant any significant attention or management time.
During the lockdown, the consumers are stockpiling essential goods such as fruits and vegetables, household care items and preventive health care and hygiene products. Further, with expected travel limitations and economic concerns in the future, it is anticipated that a new normal would emerge where consumers would expect to buy more of essential items (must have goods) such as household, groceries, health care; while cutting back on luxury and fashion merchandise (good to have goods).
The effect of this disunion of consumer trend into essential and non-essential categories is likely to percolate to the taxation regime as well. As a result, tax considerations resulting in cost saving measures, credit optimisation, etc. would fall under the new ‘must haves’ category vis-a-vis routine compliance and filings matters, which may not warrant any significant attention or management time.
With the plummeting demand for discretionary goods, one can expect the consumer market players to offer multiple discount schemes such as upfront exceptional cash discounts, buy one get one free, two in the price of one etc. Further, some consumer retailers may also offer large-scale quantity discounts in order to clear up the stock and perk up the customer sentiments once the lockdown is lifted.
Accordingly, analysing such schemes from a GST perspective i.e. if input tax credit (‘ITC’) reversal is required under GST on supplies made under such schemes would become critical, especially given that the said issues are litigious. Similarly, GST implications on marketing instruments such as vouchers, cash cards, discount coupons (for instance, timing of payment of taxes in case of vouchers, if such instruments qualify as actionable claims etc.) would also be relevant.
The pandemic also had a detrimental impact on consumer market for perishable goods or goods having an expiry or shelf life. GST provides that ITC is to be reversed for goods destroyed, written off or disposed of. Accordingly, destroying or disposing off perished or expired goods would entail credit reversals. However, there is some controversy around whether ITC reversal is required only in respect of goods fully written o? from books of account or also in respect of goods which have been partially written o?.
Further, with increasing economic austerity, a surge in non-payment of consideration/debts, return of supplies etc. is expected. Albeit GST law allows the taxpayer to claim a set-off from its output liability in case of return of goods, deficient supply of goods/services by issuance of GST credit note, no tax adjustments are permitted in case of bad-debts. Further, there could be more traction on repair/ replacement of goods in these times of austerity. Accordingly, GST considerations on bad debts, return of goods, valuation/treatment of in-warranty, off-warranty repairs should be cautiously considered by the businesses.
In the times to come, a new world order may come to light, wherein retailers across diverse categories cannot rely entirely on their offline presence even after the lockdowns are called off. They will have to inevitably adjust to the new norms of online buying. This will become even more relevant for categories like groceries and personal care where previously the propensity to buy online was low. Accordingly, business would be required to orient themselves with the GST compliance related to online business (such as registration requirement, tax collected at source etc.).
Manufacturers and retailers seeking to profiteer from surge in demand of consumer goods, due to Coronavirus outbreak could be under the government’s lens where an arbitrary increase in the prices is made. They should be wary about the anti-profiteering provisions under GST laws, which mandate passing of any benefit obtained on account of rate reduction or additional ITC to the consumers by way of commensurate reduction in prices.
It is imperative for the businesses to re-orient their protocols, practices, SOPs and operate in an efficient manner for sailing through this difficult time and one area that could need some re-engineering is GST. Companies would surely get wiser while discharging tax liability before the government. In addition, companies in consumer markets must analyse and implement cash optimisation measures such as deferring the tax liability by deferring the time of issuance of invoices, relaxing vendor payment terms for reverse charge transactions, expedite filing of refunds etc.
Similarly, credit optimisation measures such as robustness in availing Input tax credit, provisional availment of Input tax credit without matching it with GSTR-2A etc. should also be evaluated. Some of the aforesaid measures could result in significant savings in cash flows and credits which could improve the working capital management.
It would be difficult to predict how things would unfold in the future for the consumer market sector. Nonetheless, some bit of pro-activeness, analysis and implementation of tax measures could help not only in saving the ‘moolah’, but also avoid unnecessary tax controversies and exposures.
Harpreet Singh is Partner – Indirect Tax, KPMG in India and Harsha Razdan is Partner and Head – Consumer Markets and Internet Business, KPMG in India.