Some of the biggest manufacturers in the country have moved to level the playing field even before GST is put in place demanding that their vendors cut prices of goods supplied to comply with the anti-profiteering clause in the new tax regime.
The companies have already calculated the exact jump in the vendors’ margins and want that they pass it on to them. Most automobile companies and a handful of petroleum companies have started communicating to their vendors about this from early February, industry sources said.
“Many big companies have already calculated the exact impact GST would have on their operations and have even reached out to their vendors.
These companies are demanding that the vendors must reduce their price by anywhere between 2-10% as GST would benefit them and then pass it to the company,” said Srikant Jilla, managing partner, SKP Business Consulting.
The anti-profiteering clause in the revised model GST law is to ensure that the GST benefits/credits are passed on by the companies/vendors to the customers. However, this might prompt a turf war among suppliers along the manufacturing chain. While the GST framework cautions companies to maximise profits through “anti-profiteering” clause, the details of the same are sketchy.
As per the current regulations no company can profit from lower rate of GST as opposed to the current indirect taxes and will be required to pass on the benefits to the customers.
Experts said there is insufficient clarity on the penalties levied by the government in case if a company does not pass on the benefits to end customers.
Also, there is ambiguity around which of the tax authorities would collect these penalties.
GST rules also do not distinguish between cost benefits from pure taxation and jump in margins due to change on company strategy, like change in logistics planning.
“Many larger companies would consolidate their warehousing and hence would see their margins go up. But can government claim that this is anti-profiteering?” asks an industry insider. There is a view that such non taxation related increase in margins may not be passed on to the customer.
“However, large companies are demanding that their vendors reduce costs in such a situation. Some vendors may choose to move away from such a company, but most are set to give in to demands,” added the industry expert.
The Economy Times, 09 March 2017