Unilever Will Pay $18.6 Million to Preempt Profiteering Charges

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By Siri Bulusu

Hindustan Unilever Ltd. will pay $18.6 million to the Indian government to preemptively pay back tax benefits gained due to a reduction in tax rates.

The move is as part of a voluntary disclosure of income following a reduction in goods and services tax rates in November—it also comes ahead of a notice from the government alleging the company did not pass tax benefits to consumers.

The fast-moving consumer goods giant informed investors during their Jan. 17, 2017 third-quarter earnings call that it offered to proactively pay 119 crore ($18,635,400) to the Central Board of Excise and Customs—the apex Goods and Services Tax authority—as the company was unable to reduce the tax rate on existing stock following the Nov. 15 reduction in applicable tax rates.

Pass On Benefits

The voluntary payment was intended to ensure that any tax benefits stemming from the rate cut were passed on to consumers to meet the “anti-profiteering” standards required under the new Goods and Services Tax regime.

On January 8, Hindustan Unilever issued a detailed list of reduced prices on products ranging from bar soap to instant coffee powder—a reduction based on a Nov. 15 tax rate cut on wide-ranging consumer products.

Hindustan Unilever Ltd. accounted for the 119 crore under its liabilities for the quarter ending Dec. 31, 2017 and offered the amount as a check to the tax department’s “Consumer Welfare Fund,” but the Central Board of Excise and Customs doesn’t yet have a mechanism by which to accept the money, a company spokesperson told Bloomberg Tax Jan. 18.

It “remains fully committed” to ensuring the benefits are passed on to consumers. The company “communicated to trade” asking them to pass on the benefits, and “accelerated our networks” covering more than 800 stock carriage units to reduce prices, the spokesperson said.

“Due to paucity of time, it was not possible to immediately pass on the benefit of the 15th November rate reductions on some of the pipeline stocks to end consumers,” the spokesperson said. “The authorities commended the pro-active approach taken by HUL.”

The company volunteered to pay the amount in advance of the Directorate General of Safeguards—the authoritative body charged with overseeing anti-profiteering matters—issuing a notice on Jan. 16 asking to “open a dialogue.” But a Unliever spokesperson said the company is seeking details since the notice didn’t “state anything clearly.”

The Directorate General of Safeguards declined to comment.

Problematic Provision

The anti-profiteering provision has been highly contentious since implementation of the new goods and services tax system on July 1, say practitioners, since the provision enables the Indian government to levy penalties and fines against companies not passing benefits to end consumers.

“Companies like Unilever have complex pricing structures since they sell such a wide range and large volume of products,” Anita Rastogi, indirect tax partner at PricewaterhouseCoopers India told Bloomberg Tax in a Jan. 18 telephone interview.

India’s Finance Ministry has yet to release any public guidelines on how the anti-profiteering authority will determine whether a company has been benefiting from tax rate reductions instead of passing benefits to end consumers. Practitioners say this is a huge cause for concern for large companies like Unilever that depend on complex pricing models to calculate final prices.

“There is no provision that allows companies to make payments to the government, and so we’re aware the Unilever is willing to pay, but the government has to figure out how to take the money,“ Rastogi said.

Practitioners say companies found to be profiteering could suffer a huge public embarrassment, since the government would publicly issue a penalty to warn other companies of doing the same.

“Certainly it will result in a huge public embarrassment if any penalty is imposed for the simple reason that there will be a huge media response—so if any multinational is in the public eye then there will be negative public connotation,” Dinesh Agrawal, executive director of Khaitan and Co., told Bloomberg Tax Jan. 12, ahead of Hindustan Unilever developments.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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