AUGUST 28, 2018

By Dinesh Kumar Agrawal, Executive Director, Khaitan & Co

GENESIS of the anti-profiteering provision lies in the genuine apprehension of the Government that rollout of GST may lead to a short-term spike in prices, leading to inflationary pressure in the economy. Although, GST rates were supposed to be revenue neutral rates, they were not exactly neutral and, therefore, some revision in the prices were required to neutralize the tax cost either on the input or output side.

Section 171(1) of the Central Goods and Services Act, 2017 (CGST Act) provides that any reduction in the tax rate on any supply of goods or services or the benefit of input tax credit, shall be passed on to the recipient by way of a commensurate reduction in prices. The National Anti-profiteering Authority (NAA) was established to enforce the aforesaid provision with the able assistance from the Directorate General of Anti-profiteering (DGAP). The DGAP is mandated to thoroughly investigate matters referred to it by the Standing Committee after satisfying itself of the prima facie evidence of such anti-profiteering.

Even though CGST Rule 126 empowers the NAA to determine the methodology and procedure for determination of profiteering, no such guideline has been issued by them till date. Need for such guideline is accentuated due to different interpretations of the "price" and 'impact assessment". As per Section 15 of the CGST Act, the value of supply is the price actually paid or payable for the said supply. Thus, consideration paid to the supplier is the price of supply.

In the case of pre-packed commodities, Rule 6 of the Legal Metrology (Packaged Commodity) Rules, 2011 (PCR) framed under the provisions of the Legal Metrology Act, 2009 mandates declaration of maximum retail price (MRP) on each retail package by the manufacturer. As per PCR 2(m), "retail sale price" means the maximum price at which the commodity in packaged form may be sold to the consumer inclusive of all taxes. Dealers are not allowed to sale retail package at a price higher than MRP and selling of products more than the MRP is a punishable offence under Rule 32 of the PCR. Dealers are permitted to sell retail package at any price but not above the MRP. Thus, there could be a difference in the price actually paid (transaction value under Section 15 of the CGST Act) and the MRP declared on the package. MRP per se cannot signify element of profiteering.

The Government is empowered to amend GST rates for any supply by issuing a notification. Most of the time, these notifications come in force immediately, and, therefore, there is very little time available to a manufacturer to alter the MRP on the product. For most of the manufacturers and packers a lead-time of 2-3 weeks is required. Some manufacturers may be unable to alter the MRP for operational or logistical reasons. In such cases, can there be a presumption of profiteering? Going by the popular perception, the answer is, Yes.

This article aims to address this perception which has caused distress to many manufacturers.

Let's assume that a product with MRP of Rs. 100 attracting GST @ 18% is manufactured and sold by 3 different manufacturers. The present selling price in the supply chain for all 3 is as follows:

Assuming the GST rate is reduced to 12% from 18%, all 3 manufacturers fail to alter the MRP of Rs. 100 on the product but follow different pricing models as follows:

Example 1 is a perfect example where the corresponding benefit of tax reduction has been passed on to the consumer as there is no increase in the base price. However, in Examples 2 and 3, the base price has increased at various levels. In Example 2, all suppliers are guilty of profiteering whereas in the case of Example 3, only Y3 and A3, are guilty of profiteering.

There is an obligation on every supplier to reduce prices (inclusive of tax) proportionate to the reduction in the tax rate. However, the CGST Act does not require a manufacturer to either to reduce MRP of the product proportionate to the tax reduction or to ensure due compliance of anti-profiteering provisions by its distributors and retailers.

In view of the above, the question remains as to whether a manufacturer who has not revised the MRP, can be held guilty of profiteering if he has duly passed on the benefits, but his distributors or retailers have failed to do so. Can the NAA compel the manufacturer to revise the MRP?

Going by the current situation, it seems that the NAA and DGAP have come to a conclusion that a manufacturer shall be held liable to profiteering even for the lapse on part of his distributors and retailers. Echoing the same sentiments, the Finance Secretary in a press conference held in November 2017 said that "the company, which is selling products with MRP, has to ensure that its entire chain of wholesalers, retailers are informed and has to ensure that after November 15 the retailer charges the MRP after taking into consideration the reduction in tax rate from 28 per cent to 18 per cent".

It is understandable that tracking and investigating distributors and retailers would be huge task for the NAA and DGAP as it would involve scrutinizing records of a large number of suppliers and, therefore, the authorities are looking for a 'quick fix' but the legality thereof, remains uncertain.

A quick fix would be apt not under the provisions of the GST laws but under the Legal Metrology laws. GST is a destination-based consumption tax and, therefore, the basic assumption under GST is, seamless credit where every manufacturer and intermediate supplier can pass the burden of tax seamlessly to the next suppliers and ultimately to the consumer. As such, tax is not a cost in the supply chain. If the MRP is made exclusive of tax, the consumer will pay only base price and the applicable tax. In the illustrated case above, the manufacturer would have declared MRP of Rs. 84.75 on the package. In case of GST @18%, the final price would be INR100 and in case of GST @12%, the final price would be Rs.94.92. It appears that the intent of the Government is at the right place, but its departments are working differently. There is an immediate need to align all actions taken by these departments in order to make a real impact, else the ease of doing business will be remain a mere slogan.

(The views of the author in this article are personal and do not constitute legal / professional advice of Khaitan & Co.)