Introduction of GST from July 2017 was one of the biggest reforms in the indirect taxation regime, having operational challenges for banking, financial services and insurance (BFSI) sector. The financial sector always relied on centralised registration in erstwhile service tax regime, multiple registrations under GST for legal entity, taxability of supplies between each registration, change in GST rates and correctly availing the eligible credit had other IT system limitations. The focus of taxpayers at that time was to have smooth transition of daily operations to new regime. With the successful implementation of GST, the government has started focusing on ensuring the benefits of GST trickle down to end consumers. Anti-profiteering mechanism provides a powerful tool for achieving the aforesaid objective. In this article, the focus is on the anti-profiteering measure and the challenges with respect to its implementation for the BFSI sector.
One of the stated objects of introducing GST was to remove cascading effect of multiple taxes and breakage of credit chain. GST law allows taking credit on all goods and services irrespective of nature of business as service provider, trader or manufacturer. This was a landmark change compared to erstwhile tax regime, as the taxes charged by the central government were not allowed to be set off against taxes charged by the state and vice versa. The separation of taxing powers provided under constitution was leading to indirect tax becoming cost of doing business. Focusing on the BFSI sector, introduction of GST ushered direct benefit of input tax credit, mainly on account of VAT paid on purchase of goods which was not eligible as credit for service providers. However, developing and changing the IT systems and additional compliance requirements at registration level adds to the cost of doing business under GST. No clarity has been provided in law on setting off additional costs against the benefit of input tax credit.
The legal compliance of anti-profiteering and required pricing changes are equally applicable to service sector. Section 171 of the CGST Act provides for passing of commensurate benefits by the supplier. A direct throwback for the sector is the action taken in March 2018, when exemption was introduced for reinsurance business linked to exempted policies. While exempting certain reinsurance schemes, a statement was issued by IRDAI that if necessary benefit is not passed on by way of reduction in premium, suitable action may be initiated against insurance companies with National Anti-Profiteering Authority (NAA) under Section 171 of the CGST Act. The legal position of taxability of reinsurance of exempted policies was a debated issue. Companies having divergent practices regarding reinsurance, fixation of premium for government promoted insurance schemes, long term contractual obligations, high regulation of the insurance sector throw up additional challenges.
It must be noted that there are multiple factors having both positive and negative impact on costs, for GST and non-GST reasons. Even if we presume that the net benefit of GST could be derived, it is difficult to identify and apportion such benefits to the vast base and variety of corporate and non-corporate customers spread across the country. The NAA has not provided guidance on computation of the commensurate benefit and its apportionment. Apportionment of benefit of input tax credit in relation to the taxable vis-à-vis exempt turnover ought to be carried out. Attributing the benefit, if any, at customer level for fee based transaction will be posed with additional riddles in case of negotiated pricing of the fees. Further, in the banking sector, the increase in rate of input services considering credit is restricted to 50 per cent of tax paid, and the outcome in current litigation of free services, will only add to the complexity of calculating the net benefits.
Lack of clearly laid down guidance are increasing the uncertainty with respect to compliance with anti-profiteering measure. In-depth analysis by the companies and proper documentation of the decisions taken, along with financial justification for the same will be of significant importance to substantiate before authorities, the efforts taken by the company as also the adequacy of the efforts so taken.