Pre-packaged products have been the subject matter of dispute during each reduction in GST rate, especially in November 2017 and thereafter in July 2018. Accordingly, we will be discussing the challenges faced during such investigation and best practices to be adopted by companies in its response to rate reduction.
Implementation of revised pricing
Revised pricing needs to be determined keeping in view various factors. Following factors may be, inter alia, examined, decided and documented:
- Cost increase, including cost of implementing rate change measures
- Pricing decisions in the past
- Price point products
- Grammage increase
- Benefit to be passed on to consumers
- Discounts, promotional schemes including festive schemes
Requirement of MRP change – Examination of applicable allied laws:
Examination of allied laws is necessary to examine requirement of MRP change, especially considering different provisions are applicable to different goods. In this regard, following provisions may be relevant for examination:
- Legal Metrology provisions, in cases other than formulation, including provisions relating to rounding off from time to time
- Formulation, (scheduled and unscheduled), under DPCO (i.e. where legal metrology is exempted)
- Products governed by FSSAI as well as Legal Metrology
Price change needs to be holistic decision backed by evidences and data, and it needs to be ensured that the same is well documented.
Impact of price change on already manufactured products lying in depot / warehouse / or with wholesalers/retailers needs to be examined. Issues to consider include
- ITC unavailability to composition dealers
- ITC accumulation for traders, and,
- refund of inverted tax structure credit.
Importance of correct classification:
With the revised slab suggesting only 5% and 18% GST rate slabs to be retained and different rates only for some goods, it will be very important to check the correct classification of product to determine the applicable GST rate. Any misclassification could lead to a 13% differential impact across the supply chain, exposing manufacturers to significant compliance and financial risks.
Cost impact if compensation cess is done away with:
Presently, compensation cess is payable on aerated waters, carbonated beverages, etc. Credit of the same is available and utilized for payment of output compensation cess. Any removal of compensation cess, either at present or in March 2026, will result in cess no longer being payable. While this will require price re-examination (depending on whether GST rate is kept at 40%), it is important to note that the cess credit which was hitherto available on stock transfers, purchases will no longer be available. This will result in one time cost increase which will impact the pricing and stock decisions.
Credit note for past supplies:
In case of sales return or discounts in compliance with Section 34 and Section 15 of the CGST Act, GST credit note can be issued. In such cases, the original rate at which supply was made as per invoice shall be the basis for issuance of credit note. Credit note cannot be issued with new GST rate for supplies made pre-rate reduction.
Checklist and implementation guide:
- Review prices and MRP
- Impact on goods in stock at different locations in supply chain, packing material availability
- Impact on price point products, grammage, cost increase
- Legal metrology provisions, coinage, rounding off
- Credit notes for past transactions
- Review compliance with allied laws
- Compensation to supply chain, ITC accumulation, refunds
- Inverted tax structure, ISD and cross charge
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
