GST Countdown: Why Companies Must Get Their Existing Cost Structures Certified Before July 1
With the difference in opinion over existing tax rates companies should prepare against the GST anti-profiteering provision?
In its 15th meeting, the Goods and Services Tax (GST) Council fixed the rates for biscuits, footwear, readymade garments, textiles, bidis, gold, silver and diamonds. The Council also finalised GST rules relating to transition stocks and returns.
In a couple of these categories, such as biscuits and footwear, while Union Finance Minister Arun Jaitley suggested the GST rates were lower than existing rates, industry thinks otherwise.
Ritesh Kanodia, an indirect tax partner at consultancy firm Dhruva Advisors told BloombergQuint that the calculation of current effective tax rate by the GST Council may differ from industry’s calculation, and that could lead to an increase in prices for certain product categories.
Today biscuits below Rs 100/kg is exempt from excise duty and in some states, there is an exemption from value added tax (VAT) as well. Overall the understanding is that on lower priced biscuits, the effective rate is 10-11 percent and not 20 percent as was indicated. For example, there was a mention of octroi to arrive at this calculation. Octroi is levied only in Maharashtra; what about the other states?Ritesh Kanodia, Partner - Indirect Tax, Dhruva Advisors
In a press briefing after the council meet, Finance Minister Arun Jaitley said that the current effective tax rate on biscuits priced below Rs 100/kg is 20.6 percent and for others, 23.11 percent.
It’s this difference in the calculation, of the existing tax rate versus the GST rate, that could pose a challenge for companies, experts told BloombergQuint. The challenge, they explained, would arise due to the anti-profiteering provision that will penalise any person found guilty of not passing on the benefits of reduction in tax rates to consumers once the new indirect tax regime is implemented.
Uday Pimprikar, an indirect tax partner at consultancy firm EY said that the GST Council should lay down rules to ensure that a mere complaint doesn’t trigger this clause.
It has to be something more than a complaint. Let’s take telecom as an example- the sector is in a hyper-competitive stage. With some amount of abatement of this pressure, if rates go up, would that be on account of change in tax rates or market pressure easing up or factors which have got nothing to do with tax? So, the mechanisms for triggering the anti-profiteering provision need to be clear- if you don’t see any cartelisation or an abuse, this provision shouldn’t be triggered.Uday Pimprikar, Partner, EY
Kanodia added that till the GST Council provides more clarity on this provision, companies should take some precautions.
Companies have their cost structure – they know the cost of raw material and the current incidence of tax. It would be important for companies to prepare the final cost structure and get it certified because there can be questions once GST is implemented.Ritesh Kanodia, Partner - Indirect Tax, Dhruva Advisors
There is no downside in preparing for the worst, he added.