Since the introduction of GST from 1st July 2017, the GST Council has rationalised GST rates from time to time. These GST rate changes have a significant impact on the taxability of various goods and services and in turn, impacting the final price of a product. Thus, businesses need to be prepared on how to deal with these changes and take the necessary steps to pass on the benefit to the consumers, if there is a reduction in tax rates.

When and how does the GST rate change?

The GST Council consults the Fitment Committee for any GST rate change. Then the proposed GST rate changes are announced at the GST Council meetings. Later, the CBIC gives effect to the changes by passing a notification on the CBIC website. Usually, the date of implementation of the new rate is mentioned in the notification itself otherwise the date of implementation shall be the date of publishing the changes in the official gazette of the Central Government.

Why is the GST rate change necessary?

The GST Council has introduced Anti-Profiteering Rules to ensure that if there is a reduction in tax rates on particular goods/services, then the benefit of such reduced tax rates is passed on to the consumers by way of reduction in prices. The Council has also changed GST rates from time to time to rationalise the GST structure. Some of the reasons for GST rate change are:
  1. To correct the inverted tax structure which is very important for businesses to run smoothly and not to face any working capital issues.
  2. To reduce the price of goods which are essential items (such as food items, basic clothing, etc.), so that everyone can afford such goods/services. 
  3. To bring parity in prices of like goods/services which do not vary much in quality/terms of service.

How can businesses deal with GST rate changes?

Section 14 of the CGST Act deals with the time of supply in case of changes in tax rates. In case of a change in tax rates, there can be two scenarios:
  1. Supply is made before the change in the tax rate
  2. Supply is made after the change in the tax rate
In one supply transaction there are three supply dates involved:
  1. Date of supply
  2. Date of invoice issue
  3. Date of receipt of payment
How to determine the time of supply in case of a change in tax rate is explained below:

Section 14(a) If supply is made before the change in the rate of tax

Issue of invoice Receipt of payment Applicable time of Supply
After the change in the tax rate After the change in the tax rate Date of receipt of payment or date of issue of the invoice whichever is earlier
After the change in the tax rate Before the change in the tax rate Date of payment
Before the change in the tax rate After the change in the tax rate Date of invoice

Section 14(a) If supply is made after the change in the rate of tax

Issue of invoice Receipt of payment Applicable time of Supply
Before the change in the tax rate Before the change in the tax rate Date of receipt of payment or date of issue of the invoice whichever is earlier
After the change in the tax rate Before the change in the tax rate Date of Invoice
Before the change in the tax rate After the change in the tax rate Date of payment
Note:
  1. For this purpose, the date of receipt of payment shall be the date on which the payment is recorded in the Books of Account of the supplier or the date on which payment is credited to the bank account of the recipient, whichever is earlier.
  2. The supplier has to issue debit/credit note as the case may be to give the effect of the new rate.

How can the GST auditors deal with GST rate changes?

A Chartered Accountant/Cost Accountant appointed by the taxpayer is required to audit the records of the taxpayer. For GST rate changes, an auditor has to verify whether GST rates have been reduced for the goods the taxpayer deals in. If yes, he needs to check whether the rate cut benefit is passed on the consumers as per Anti-Profiteering Rules under GST. If there is a violation in passing on the GST rate cut benefits then the same should be reported by the auditor.

Legal consequences of not passing on the GST rate cut benefits

As per the Anti-Profiteering Rules, a registered person must pass on the benefit by the reduction in prices
  • If there is a reduction in the rate of tax on the supply of goods or services or 
  • The benefit of the input tax credit is now available under GST
The GST Council has reduced the tax rates a lot of times. Still, the businesses are not passing on the benefits to the consumers and are profiteering the extra tax charge as profit. The National Anti-Profiteering Authority can make the defaulter, pay an amount equal to the amount not passed on to the consumer by way of reduction in prices along with interest at the rate of 18%. The interest is calculated from the date of collection of the higher amount to the date of return of such amount.