Anti-profiteering Provisions: Will Cost Records Act As A Saviour For The Companies

With the government's clear intention of providing the benefits to common masses by bringing down the GST rates on most of the items, now it's time for the companies to keep all the costing & pricing data ready with audit trails so as to convince any authority about the increase or decrease in prices post GST transition. The anti-profiteering provisions are there in GST Acts to help the government to ensure that the common masses enjoy the benefits of the reduction in rates by way of reduced prices.

Section 171(1) of the CGST/SGST Act states

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.

We need to learn from past experiences that no reduction in prices happened even though there was reduction in tax rates during VAT transition as no such clause was present in VAT Acts. Lessons seem to have been learnt by the government that incorporation of provisions like anti-profiteering is the necessity in complex business scenarios.  A big transition happened when Sales tax regime in all states was shifted to VAT in 2005. The governments convinced the common masses that prices will come down but what happened is known fact.

CAG also initiated one study report titled as 'Implementation of Value Added Tax in India - Lessons for transition to Goods and Services Tax - A Study Report' on the transition of Sales Tax to VAT and observed:

'Besides weak monitoring also hampered ensuring that the reduction in rates of taxes showed up in the prices of the commodities and the benefit reached the desired beneficiaries (common man). Our Study found that 13 manufacturers did not reduce the maximum retails price of the goods despite sharp decline in the rate of tax. Consequently, the benefit of Rs. 40 crore was illegally retained by these manufacturers and the dealers in VAT chain instead of passing on to consumers.

The CAG report highlighted that tight monitoring is required if the government actually intends to provide benefits to the masses. The following questions must be addressed through research with conclusive evidences:

1. What are the category of goods and services where rates were brought down.
2. What were the prices before transition to GST on monthly basis for each of the month for the last one year
3. What prices were charged after transition to GST for each of the month
4. What were the authenticated costs of each of the product or services (established through cost audit mechanism) before transition
5. What were the authenticated costs of each of the product or services (established through cost audit mechanism) after transition.

Luckily in India, cost audit mechanism has been established by Ministry of Corporate Affairs which can come to the rescue of manufacturers to justify their stance regarding pricing and costing on one hand and on the other hand it also helps the government to probe with ease as the costing and pricing data is available at SKU levels.

Indicating the government's firm resolve to implement the anti-profiteering clause if necessary, Revenue Secretary Sh. Adhia said, 'MNCs should not indulge in hiking prices in view of lower tax incidence under GST. Such businesses could be called for explanation by the anti-profiteering authority if the prices are hiked in these two-three months. The anti-profiteering authority could conduct a cost audit on such companies.'

(Source:http://www.financialexpress.com/economy/gst-set-for-july-1-rollout-but-complicated-rate-structure-for-services-will-prove-problematic/677378/?utm_source=izooto&utm_medium=push_notification&utm_campaign=browser_push&utm_content=&utm_term=)

Extract of the TOI dated 20th may 2017

Asked by the media about the impact on mobile bills and other services in the 18% slab, Jaitley said 'Although the headline rate may appear higher (than the current 15% service tax), the actual incidence will be lower since companies will get input tax credit for goods that they use. If companies don't pass on the benefits, we have the anti-profiteering clause.'

Presently, every person from common masses to even finance minister is concerned that whether the reduction due to decrease in rates will be passed on or not and last hope to ensure that is ANTI-PROFITEERING provision which is totally linked to costing and profitability at SKU level.

Induction material on Ministry of Corporate Affairs site mentions

Cost Audit Branch is mandated to perform following functions as per the provisions of the Companies Act, 2013: Matters falling under Section 148 of the Companies Act, 2013 including:

a) Policy framing -

(i) Framing policy framework for cost accounting records and cost audit in the corporate sector.

(ii) Identification of class of companies i.e. the industries /sectors for inclusion/exclusion under the provisions of section 148 of the Companies Act,2013.

(iii) Prescription of order/rules for maintenance of cost records and cost audit thereof by Companies including review, rationalization and amendment or modification of the existing ones.

(Source: http://www.mca.gov.in/Ministry/pdf/inductionmaterial.pdf)

The Ministry of Corporate affairs may bring in cost compliance mechanism and include more HSN codes (especially of mass consumption items i.e. FMCG and other services) in cost audit regime.

All FMCG companies or companies selling products having MRPs or companies manufacturing products for B2C segment must keep their documentation very strong to overcome any type of contentions by departments at later stage that the benefits were not passed on.  

Precautions to be taken by the companies under cost audit or cost records mechanism:

The companies under cost audit must prepare the cost records at SKU level and ensure that all the factors of the cost where actual benefits of the reduced rates have been availed are kept ready for any verification as and when required showing the relevant decrease in final prices of the goods. E.g. the companies having central purchases and paying CST may get benefits in the form of reduced taxes.

Map all the data with the statutory returns being filed with any of the statutory authorities.

Before filing the data with MCA get the same critically examined by GST consultants/ proposed GST Auditors.

Let's welcome GST with folded hands with a hope that ultimately the compliance burden will reduce.

The author can also be reached at navneetic@yahoo.com.