Consumer durables firms, GST body continue to spar over profiteering

Most durables companies say they have passed on GST tax benefits after the 10 percentage point cut in July

Home appliance makers, like their counterparts in fast-moving consumer goods (FMCG), will be monitored closely by the National Anti-profiteering Authority (NAA) for not passing on the benefits under the goods and services tax (GST) to consumers. 
 
While durable majors now and FMCG companies earlier have repeatedly said GST rate reductions have been passed on to consumers, the NAA refuses to relent. Last week, the country’s largest consumer goods company Hindustan Unilever (HUL) was slapped with charges of profiteering to the tune of Rs 4.95 billion, which, the firm said it had responded to in a comprehensive manner. “We are confident that the NAA will consider our inputs and the practices followed in the FMCG industry, and take a just view of the matter,” an HUL spokesperson said.
 
At the heart of the matter is the interpretation of the GST law, say executives from FMCG and durables companies. “The anti-profiteering body expects every stock keeping unit to see a reduction in price following a GST rate reduction,” said 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 following GST rate reductions. This means non-sachet packs have seen a price reduction, 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 NAA.
 
While FMCG companies have lobbied hard (with the NAA) to allow grammage increase on packs as GST benefits after rate reductions, no decision has been announced yet in the matter. Companies such as HUL have gone a step ahead, and voluntarily offered to pay up for GST benefits that were not passed on to consumers. “This amount, aggregating to Rs 1.6 billion (including Rs 360 million on behalf of our redistribution stockists), has been deposited with the Consumer Welfare Fund of the government,” the HUL spokesperson said. “During the entire process, we have kept the government informed of the approach and the manner that we have adopted in passing on the GST benefits to consumers,” the spokesperson said.

 
In the case of durables companies, the problem is even more 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, which implies that passing on the GST benefits in terms of price cuts is a challenge,” an industry expert said.
 
Most durables companies, however, say they have passed on GST tax benefits after the 10 percentage point cut in July. “The effective price cut works out to 7.8 per cent, and this has been passed by us as well as all other leading brands in July itself,” Eric Braganza, president, Haier Appliances India, said.
 
Kamal Nandi, executive vice-president and business head, Godrej Appliances, has endorsed the point. “We have taken all steps to let consumers know of the price cut after the GST rate reduction in July. Most other leading brands have also done the same,” he said.
 
Tax experts say the constant scrutiny by the NAA is also linked to the inability of the retail trade to pass on the GST tax benefits following rate cuts. “While firms, at their levels, are doing all they can to communicate price cuts to dealers, distributors and retailers, the problem emerges with existing stock lying with trade. Stickering can work to some extent, it does not solve the issue altogether,” says an indirect tax expert.

 
“What the government should have done is to allow a moratorium period of a month or so after GST rate reductions to ensure existing inventory is exhausted with trade. This would have ensured that they deal only with new stock once the transitory period is over. This way the system would have been fair to traders,” he said.