Rate cut must be passed on for each packet size, says GST authority

Companies or dealers may have to cut prices of each stock keeping unit (SKU) of their products to pass on the benefits of any lower goods and services tax (GST) rate.

This comes from an order of the national anti-profiteering authority (NAA) in a case related to a Maggi noodles (Nestle’s) dealer. A retailer of Maggi had alleged that despite reduction in the GST rate from 18 per cent to 12 per cent in November 2017, the base price of a 35g pack, also known as the Rs 5 (MRP) pack, was increased to bring it at par with the pre-rate change price, including taxes. 

The (wholesale) dealer argued the benefit which had accrued in respect of the Rs 5 MRP pack had been passed on by reducing the price of the other pack of Maggi, the Rs 12 MRP one. Further, that price of the latter pack was reduced by Re 1, more than the total benefit arising on both types of packs, of 92p. 

Such a reduction, added the dealer, was made in light of the shortage of small-value currency notes and non-availability of coins less than a Re 1 value. 

The complainant subsequently sought to withdraw the grouse in question but this request was rejected, stating investigation had already been undertaken by the authorities. The NAA has since held that the dealer had no liberty to arbitrarily decide in respect of which products he should pass on the benefit. A 35g Maggi pack was distinct from a 70g one; they could be bought by different customers. Hence, the benefit accruing to one customer cannot be given to another. 

The NAA has, therefore, told the dealer to deposit Rs 90,778, the amount considered ‘profiteered’ in sum, with annual interest of 18 per cent, into the Consumer Welfare Fund, after refunding the retailer the ‘profiteered’ amount of Rs 2,253 (with interest). A similar ruling was given by it recently in a case involving Lifestyle International, on cosmetic products. 

Pratik Jain, partner at consultancy PwC India, noted the authority has rejected the plea on fractional pricing due to the difficulty in legal tender. Instead, directing that it is for a customer to furnish the required legal tender and a supplier could not make a profit on this account. 

This ruling could be a problem for the fast moving consumer goods sector, for one. "From a commercial standpoint, reducing the price of each SKU, particularly with a small MRP (Rs 5 or below) is often a challenge, including availability of legal tender below Re 1,” Jain said.

Harpreet Singh, partner at consultancy KPMG, said it would be very difficult to pass on the rate reduction profit on each item, particularly products such as sachets of sauce, shampoo and the like. 

The impact would be in paise, he noted.

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