Revised draft Model GST law proposes the Measure and it reads as follows:
In substance, it is proposed that the Authority will examine:
For the purpose, Authority will exercise prescribed functions and will have prescribed powers including to impose penalty.
Circumstances in which credit availment needs to be passed on are not clear from the provision. In other words, like, reduction in rate of tax, there is no clarity as to when credit availment may result in reduction of price. Possibly, every credit availed is not contemplated. Can it include, say, credit in respect of stock?
Prima facie, the proposal presumes that availment of credit or reduction in rate can automatically result in reduction of price.
The heading of the provision speaks of "profiteering" implying that unreasonable profits are made and the provision is to curb it. The language of the provision itself; however, requires examination of the fact whether credit or reduction has resulted in, commensurate reduction in price, implying that reduction in price should be to same extent or equal to Credit availed or reduction in rate.
In other words, though, profiteering implies unreasonable profit, language implies reduction in price which is same as availment of credit or reduction in rate (irrespective of fact whether any profit is made or not).
Apparently, the provision would apply on account of "change". Rate reduction may happen upon implementation and even thereafter. However, changes about credit availment, it appears, will happen only upon switch over to GST and not otherwise. By and large, the change may happen on account of non-availability of credit of tax paid under earlier law and availability of credit of GST paid. Otherwise, there may not be any change.
Usually, they are market conditions or economic factors or the like as well as change in cost factor or revision of price on account of commercial or other necessities (as may be initiated by RTP). Thus, by and large, pricing is based on such and other commercial or economic factors, which would include availability of credit and/or reduction in rate being factors affecting cost (obviously, having regard to market and other conditions).
Normally, an indirect tax is passed on to consumer (having regard to market conditions). If, in respect of any indirect tax, credit is not available that may be factored as cost to be borne by supplier and usual margin charged may take care of it or cost may be factored to determine price. Once again, this will depend on commercial and economic factors.
Per se, it may be said, there is no obligation about factoring tax cost in cost or price; however, law does permit recovery of indirect tax from customer.
GST is a value-added tax based on destination principle. Tax borne by ultimate consumer is collected in stages, through supply chain and while collecting and paying tax on respective supply, tax paid earlier can be reduced and only balance needs to be paid. That is, for obvious reason inasmuch as supplier in the chain has already paid GST to its supplier and who in turn has paid it to the government. An illustration in respect of the above would clarify the matter:
| Cost/Price | Tax@12% | |
|---|---|---|
| Procurement of RM | 50 | 6 |
| Services | 20 | 2.4 |
| Other cost | 10 | - |
| Margin@25% | 20 | |
| 100 | 12 |
As per illustration, when RTP sells (to ultimate consumer), GST payable by ultimate consumer is Rs. 12; RTP collects it from consumer; on procurement of raw material and service RTP has paid Rs 8.40 as GST to suppliers; suppliers have paid or are liable to pay GST to the government; accordingly, RTP can deduct Rs. 8.40 (by way of Credit) and pay balance of Rs 3.60. Thus, it is clear that tax is not factored as cost to fix price.
If position is compared with Earlier law, it is found that tax paid on services was not available as Credit; however, it is available under GST law. Credit not available under earlier law was factored as cost to be met out of margin and not otherwise. In such a case, impact or effect would be on margin and not price.
Thus, it may be appreciated that RTP may not be able to pass on credit in form of reduction in price. Further, while determining his own price, he never factored tax cost. GST may never enter price determination. If so, how can it be, in any manner, passed on to consumer in the form of reduction?
Prima facie, it appears, the provision should not apply; however, if one compares Credit availment, on a stand-alone basis, apparently, RTP gets credit of Rs 2.60 (earlier not available). Is he obliged to pass on this as a reduction, in terms of the provision? Position does not seem to be clear
Where input tax paid is higher and output tax is lower, a dealer may be entitled to refund of excess tax paid on supply. If GST is not factored while calculating cost or price, question of passing it on does not arise. Suppose, on product supplied, say, 5% tax is payable and, say, it's price is Rs 100. Customer has to suffer GST of Rs. 5. On purchase, say, of Rs 80, RTP paid tax at 12%, that is, Rs. 9.60 to its supplier; supplier paid GST to the government; as tax paid was more RTP claims refund of Rs 4.60 (which is already paid but not considered to arrive at cost or price). Thus, it is only a situation of recoup of cash outflow through refund. Cash flow (in or out), does not enter cost or pricing and will not be, obviously, passed on inasmuch as tax is already paid to the government.
Usually, RTP will charge tax separately, at the applicable rate, to enable recipient to avail credit, if any, in respect thereof. Obviously, when tax is charged at applicable rate, commensurate reduction is obvious. However, where the price charged is inclusive of tax, reduction in rate, whether factored in or not may have to be considered.
In business, there are various factors influencing price; some may increase price and, as a result, the reduction in price on account of credit availment or rate reduction may be offset.
Prima facie, the provision needs more clarity as to its nature and scope and when would it apply, for practical implementation by RTP.
In terms of the provision, it appears, taxpayer would be obliged to show that it has complied with the requirements; taxpayer must substantiate it by producing necessary evidence, working, confidential information and the like. For the purpose, it will have to maintain necessary details, records and evidences to satisfy Authority, if and when the question is raised.
