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B2B companies seek certification from vendors on GST gains
February, 06th 2018

Fearing that anti-profiteering mechanism may be triggered against them, many companies that are primarily in B2B (business to business) segments are asking their vendors to certify that they are passing on the benefits accrued under goods and services tax (GST).

These companies — in sectors such as shipping, ports, electricity distribution and oil and gas — also suspect vendors may not be passing on benefits as prices in several cases haven't changed despite rate reduction under GST, said people in the know. Under anti-profiteering rules, any company or vendor whose profits jump due to the new tax regime must pass on benefits.

Companies have asked their vendors who supply everything from steel to information technology and from plastics to housing equipment to provide these certificates. The problem is most vendors are unable to procure these certificates.

Tax experts point out that it is difficult to provide such certificates as it has some practical problems. "Several companies are being asked by their customers to declare that benefits in terms of increased input tax credits or lower tax rates in GST have been passed on to them. In the absence of any prescribed methodology for ascertaining the quantum of benefits obtained and passed on, it is very difficult for them to accurately ascertain the same," said MS Mani, partner, Deloitte India.

Take the case of a multinational computer technology company that provides software to at least four port companies in India. It has not been able to get the certificate in the past six months.

At least two vendors, including the technology company ET spoke to, said that in some cases, companies are holding back payments till such certificates are provided. "Also what does one write in these certificates," asks a tax analyst, "That the company is passing on the benefits of GST? There is no one way to make sure that they are, and who would want to get in trouble with future CAG audits?"

Industry trackers said in most cases, these are demanded by public sector companies, including port authorities, state electricity boards and companies such as ONGC. Some private sector companies too are demanding that their vendors disclose GST gains.

"Many public sector companies are asking their vendors to provide a certificate from a reputed CA stating that the benefits of GST are passed on. On the other hand, private sector companies are reaching out to vendors and asking them to pass on additional tax benefits accrued to the vendors due to GST and in many situations re-negotiations are carried out around pricing," said Sachin Menon, head of indirect taxes, KPMG India.

In the past DGS, the investigative arm of the finance ministry, has slapped notices on HUL, Hardcastle Restaurants, which runs McDonald's restaurants in west and south India, Lifestyle International and Honda Motor.

Currently, the government is scrutinising whether service sectors such as telecom, banks and insurance companies too are following anti-profiteering rules, insiders said. While tax rates in these sectors are unchanged, GST has increased the scope for input tax credit for banks, insurers and telcos, which account for about half the B2C services sector.

The government could become more aggressive with anti-profiteering in the coming months as this could trigger inflation. In several countries where GST was introduced in the past—mainly Australia and Malaysia—inflation increased drastically after two years of its introduction. If the same happens in India this may have a political fallout, industry trackers said.

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