Goods in transit return to haunt traders after GST rate cut

The recent goods and services tax (GST) rate cuts may have sent a cheer among businesses. However, the absence of a mechanism for compensating the hit they will take on goods or services which they have already invoiced at higher rate, is somewhat diluting their elation.

A CFO of a leading FMCG company, who spoke off-the-record to DNA Money, said there were two-three months of goods in transit – lying either with distributors or retailers – that have been charged at 28% but on government request will be sold at revised rate.

This, he said, would mean his company would have to absorb losses, if any, due to reduction in prices.

"The FMCG sector has stock of two-three months in the market. Now, if the rate is changed and lowered, how will they get compensated (for goods in transit)? There is no mechanism by which you can get compensated for it. Ultimately, as a prudent corporate citizen, we will take the hit if it cannot be shared between distributors," said the financial chief of the multinational company.

M S Mani, senior director, Deloitte, also feels government's "intention" to protect consumer's interest would get better translated into reality if it prescribed a methodology for compensation of losses on transit stocks.

"Here, the intention of the government to protect the interest of consumer is excellent. But to translate that intention, there has to be a methodology prescribed by the government. It should say what happens if the stock is already invoiced by the manufacturer at a higher rate of tax? How do you deal with it? Would there be a refund or any other mechanism by which manufacturer, distributor or retailer is compensated (for losses due to GST rate cut)?" he said.

The anti-profiteering legislation under GST has a provision by which any reduction in tax liability or input tax credit (ITC) has to get passed on to the consumers. In case of any violation of this clause, concerned authorities can initiate action against the offender.

After the latest revision of GST rate, the government has goaded companies and traders to pass on its benefits to end-users of goods and services. Most major FMCG companies have announced downward revisions in prices of goods for which rates have been slashed.

Explaining the predicament of FMCG companies, Mani cited the example of shampoo, "If a shampoo manufacturer wants to revise the price, he can do that in respect of stock lying in factory which he has not dispatched. He will be paying a lower rate of GST for that. But in respect to the stock which has already been dispatched paying higher rate of GST and is lying with his distributors and retailers and has been invoiced at higher rate of GST, what does he do? He (manufacturer) has already paid to the government. Will he tell the retailer to reduce the price? If he tells the retailer to reduce the price, the retailer will ask him to give a credit note. If he (manufacturer) gives the credit note, will the government give the tax back to manufacturers? There is no provision in the law for this".

The Deloitte tax consultant revealed that with no mechanism in place, most manufacturers were asking retailers to pass on the rate cut gains to consumers, but were remaining silent on whether they will be compensated or not.

"There has to be some mechanism to figure out what needs to be done. It should not be left to companies to decide what they should do. It has to be common across companies in India," said Mani.

Suresh Kumar Rohira, partner, Grant Thornton India LLP, feels the government has not fully thought through the "step" it has taken.

"Frankly, it's a step which they (government) have taken but I don't know whether somebody has really thought through minor nuances. The traders eventually will say I will have adjusted somewhere or the other. He has to ensure business goes on as usual. I doubt whether they (government) will be able to get into mechanism of allowing refund/compensation for losses on transit of goods due to tax reduction to manufacturers, distributors and retailers," said the Grant Thornton tax expert.

TOUGH SITUATION

• Any reduction in tax liability or input tax credit (ITC) has to be passed on to the consumers
   
• In case of any violation of this clause, concerned authorities can initiate action
   
• Traders have been asked to pass on cuts