2018-08-09 00:00:49Finance and Accounting: TaxesEnglishThe fear of anti-profiteering mechanism is forcing companies to ask vendors to supply proof that they're passing GST benefits. Here's...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2018/08/B2B-company-reps-discuss-GST-credits.jpghttps://quickbooks.intuit.com/in/resources/finance-and-accounting-taxes/anti-profiteering-under-gst-all-you-need-to-know/Anti-Profiteering Under GST: All You Need To Know

Anti-Profiteering Under GST: All You Need To Know

4 min read

As of early 2018, many companies are requesting that their vendors supply proof they’re passing on GST benefits. The request is fueled by fear of the anti-profiteering mechanism. But unfortunately, there isn’t an established way for vendors to provide this information. The issue is complicated. To understand what’s happening, you need to know about anti-profiteering under GST.

What’s Anti-Profiteering Under GST?

When India rolled out the new GST system, the country banned businesses from profiting due to the tax. Imagine a company sells a product for ₹100. Under the old tax system, it faced a tax rate of 15%, making the total price ₹115. But under the GST regime, that same product falls into the 5% tax slab. Now, according to the government, the product should sell for ₹105.

But the GST Council knew that some companies might be tempted to take advantage of the tax scheme. To continue with the above example, say that company has clients who are used to paying ₹115. Rather than lowering the price to reflect the tax change, the company decides to keep the price at ₹115. Thus pocketing the ₹10 difference. The anti-profiteering rules are designed to prevent this from happening. Similarly, if a company saves money due to input tax credits, it also has to pass those benefits to its clients.

Why Must a Company Pass on Benefits to Clients?

It seems reasonable for a company to profit if it is in an industry where its GST rates went down.  After all, profit is arguably the point of business. But the government isn’t just focused on the needs of individual businesses. Rather, it wants to safeguard the country’s economy as a whole. In particular, the GST Council doesn’t want the GST to trigger inflation. And it believes that if businesses profit from the system, that may happen. This fear isn’t unfounded. When Australia and Malaysia introduced the GST, they both experienced intense inflation for two years.

What Is the Anti-Profiteering Authority?

The Anti-Profiteering Authority has the right to check for undue price increases. Also, it checks for other situations where companies should be lowering prices. If the authority finds that a company has not passed on its GST benefits, it can force the company to lower its prices. It can also require the company to refund the savings along with 18% annual interest. If the buyer can’t be found, the offending company may have to deposit the refund into the Consumer Welfare Fund.

Why Are Companies Worried?

Now that you understand the anti-profiteering rules, here’s why it’s important. Companies that do a lot of b2b transactions are worried they may be targeted by the Anti-Profiteering Authority. To protect themselves, they want proof that their vendors are complying with the anti-profiteering rules.

To explain this concern, imagine a vendor sells a company a product for an inflated price. Based on the price of that supply, the company also sells products to its customers at an increased rate. But the prices are so high that the Anti-Profiteering Authority becomes alarmed. Then, it launches an investigation against the company and decides it’s guilty of profiteering. But in reality, the issue was due to the company’s vendors.

Who Is Affected?

Companies requesting extra information are mostly in sectors like shipping, electricity distribution, and oil and gas. They work with vendors that sell steel, information technology services, plastics, and countless other products. They want reassurance that their vendors are passing on GST benefits to them.

Most concerns come from public companies, but many private companies are requesting this information as well. As of February 2018, several of these companies are even refusing to pay their vendors until they receive certification.

Why Do Vendors Have Difficulty Complying?

Although the request seems fairly straightforward, it’s really difficult for vendors. The companies making the request want a statement from a chartered accountant. This places an additional administrative burden on their vendors. In addition, there’s no established protocol for creating this type of certification. The vendor could simply write a statement promising it’s passing on the benefits. But of course, that’s subject to issues.  MS Mani, a partner at the accounting firm Deloitte in India, says that there is no protocol for making these statements. Also, it’s difficult for companies to even assess how much they’re saving under the GST system.

Are There Alternatives?

In lieu of getting certification, some companies are just asking their vendors for assurance that they’re passing on the benefit. Also, they are attempting to renegotiate prices. Say, you come to know that your vendors are facing lower sales taxes under the GST system. You may be happy if the vendor discounts the price accordingly. Similarly, say you estimate that your vendors are saving x amount due to input tax credits. You may be happy with a discount that reflects that shift.

If you want certification from your vendors, and they’re willing and able to provide it, you’re in luck. If not, keep in mind that you can’t control what your vendors do. But you can create clear detailed records that prove your own compliance. To protect yourself in case the Anti-Profiteering Authority contacts you, keep quality, detailed accounting records through accounting software like QuickBooks.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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