Tax benefit issue sets companies, GST body on collision course again

Interpretation of the law is an important aspect, say executives at FMCG firms

A cross-spectrum of companies has found themselves at the receiving end of notices by the directorate general of anti-profiteering (DGAP) for not passing on the benefits under the goods and services tax (GST). The current spate of queries has brought the issue of profiteering back into focus after firms such as Hindustan Unilever (HUL), Nestlé and Jubilant FoodWorks were slapped with notices last year.

While companies in the latest round, including Proctor & Gamble, ITC, Patanjali, Johnson & Johnson and Samsung, have all reiterated that GST rate reductions have been passed on to consumers, DGAP appears unconvinced, saying it will continue to widen its probe. 

According to industry sources, interpretation of the GST law is the heart of the matter. “The anti-profiteering body expects every stock keeping unit to see a reduction in price following a GST rate reduction,” says the CEO of a top FMCG company. “This is difficult to do for sachets and low-unit packs, which are available for Rs 1 and below. Touching price, when it comes to these packs, will create an issue in terms of weights and measures. That would mean a run-in with another regulator, which is the metrology department. I don’t think companies are ready to do this,” he said.

In an attempt to work around this, most FMCG companies have taken a “portfolio approach” to price cuts after GST rate reductions. This means that non-sachet packs have seen a price cut while low-unit packs have not. Some companies have also opted to increase grammage on some non-sachet packs in lieu of price cuts, a move contested by the DGAP and the National Anti-Profiteering Authority. Earlier this year, the NAA had said HUL profiteered to the tune of Rs 462 crore by not passing on GST benefits in terms of price cuts, which was challenged by the company.

In the case of durables companies, the problem is even acute, said indirect tax experts. “Here, firms work at market operating price (MOP) and not maximum retail price (MRP). MOP is a discounted price to MRP, implying that passing on the full GST benefits in terms of price cuts (on MRP) is a challenge,” an industry expert said. In July last year, most consumer durable companies had passed on a 7.8 per cent price cut to consumers after GST was slashed by 10 percentage points.

While the Delhi High Court has stayed NAA’s demand of Rs 462 crore on HUL pending final resolution of the matter, experts say a clear set of guidelines will help. “There is a need for a formula to determine what constitutes profiteering and what doesn’t,” says Amit Sarkar, partner and head, indirect tax, BDO India. “In the absence of objective benchmarks, the GST body and companies have found themselves on opposite sides of the spectrum resulting in conflict. This will have to be resolved given that it becomes difficult for companies to go back to price changes initiated in the wake of GST rate cuts initiated last year or the year before,” he says.

Some experts argue that the concept of profiteering and anti-profiteering is relatively a new one for the GST body and that constant engagement with industry would help. “Some mid path would have to be worked out otherwise litigation will only increase defeating the purpose of the law,” says Suresh Nandlal Rohira, partner, Grant Thornton. 

Experts say the tenure of the GST anti-profiteering body, to end by July, will likely be extended by another year to thrash out differences.

Tug of war

• Anti-profiteering body has been at loggerheads with consumer goods companies
• The body claims that firms have not passed on GST benefits to consumers
• Last year, HUL, Nestlé and Jubilant FoodWorks were slapped with notices; this year P&G, ITC, Patanjali, J&J and Samsung are under the scanner 
• The divergence is due to the interpretation of the GST law
• The anti-profiteering body wants price cuts on all SKUs, but companies say this is not possible