NOVEMBER 20, 2018

By Koushal Sonthalia

ONE of the important provisions of the CGST Act is "Anti-profiteering".

Background and absence of methodology

The intention of this article is to discuss the emerging jurisprudence on anti-profiteering but before we commence the core discussions, let us look at certain basics. Globally, one of the major fears about GST is that it results in inflation in the short term. Being a price sensitive nation where taming inflation is always on the agenda of the government, India could not have afforded any such inflationary pressures.

India, therefore,chose to ease such pressure in two ways- one by ensuring that the applicable rate of GST is closer to the effective pre-GST tax rates (in this process some commodities are now subject to a tax rate which is lower than that under the erstwhile regime) and two, by introducing anti-profiteering provisions which require that any benefit arising out of reduction in tax rates or increase in benefit of tax credits are required to be passed on commensurately by way of reduction in prices. While the intent seemed to be good so far, it is the implementation of this provision that is currently haunting and is also expected to torment the taxpayers in future.

National Anti-Profiteering Authority was constituted to check the compliance of anti-profiteering provisions by taxpayers for an initial period of 2 years. However, there are multiple media reports stating that pruning of tax slabs can be expected in future such that the products which currently attract tax rates of 12% and 18% may be merged to form a new slab of, say 15%. In this process, products which currently attract tax rate of 18% would all become subject to anti-profiteering provisions and accordingly, an extension of the tenure of the authority could be on the cards. It is, therefore, important to understand the provisions and related issues.

One of the most comprehensive reviews of tax rates was undertaken by the GST Council in its 23 rd meeting held on 10 th November 2017, wherein tax rates were cut for over 170 items. While one year has elapsed from the time this change was effective, the simple exercise of GST rate cut has left a lot of scars on the industry.

Let us now discuss the anti-profiteering provisions under GST law and try to compare it with similar provisions under foreign laws.

Section 171 of the Central Goods and Services Tax Act, 2017 ("CGST Act") reads as under:

"(1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices."

Sub-section (1) provides for two situations which require reduction in prices under the anti-profiteering provisions:

a. Reduction in the rate of tax;and

b. Availability of input tax credit.

While Section 171 requires passing of benefits arising out of reduction of tax rates and availability of Input tax credits, the industry is complaining that till date that no methodology has been prescribed indicating as to whether this benefit is to be passed on at an entity level or product category level or at SKU level.

Malaysia

Malaysian law prescribed the formula to determine whether there is any increment in the net profit margin during a specified period post implementation of GST. In order to be compliant with the regulations, the net margin post GST could not have been more than the pre-GST net margin.

Australia

The anti-profiteering measures in Australia revolved around the ‘Net Dollar Margin Rule'. That is, if GST caused taxes and costs to fall by USD 1, then prices should fall by at least USD 1. At the same time if the cost of the business rose by USD 1 under the new tax scheme, then prices may rise by no more than USD 1.

It can be seen that while Malaysia and Australia had laid down guidelines for compliance with anti-profiteering provisions, no such guidelines are available in India.

The tax administration has however been on high campaign mode, proactively working to ensure that the consumers are aware about GST rate reductions by way of advertisements in the print and social media. The Finance Secretary has gone on record to say that delay in passing of benefit of GST rate cuts till disposal of old stock will not be tolerated. Also, the Chairman of National Anti-profiteering authority has beenaddressing the media time and again on this issue while stating that benefits arising out of GST rate need to be passed on.

Methods adopted to pass on benefits

In the absence of any guidelines on how the benefit has to be passed on, taxpayers chose their own ways to pass on the benefits. While the simplest way to pass on such benefit was by way of MRP reduction, owing to challenges in immediate execution, some of the ways adopted to pass on benefits are/were:

++ Increased grammage;

++ Price discounts on the printed MRP;

++ Price difference claims to trade partners;

++ Trade schemes;

++ Free supply of the same or different goods;

++ Cancellation of planned price increase;

Orders by National Anti-Profiteering Authority (NAA)

Common views which emerge from the orders passed by the National Anti-Profiteering Authority are as follows -

++ Benefit is to be passed on through reduction of price only;

++ Discounts cannot be accepted as a way of passing benefits;

++ Price reduction is required for every SKU and cannot be seen at an average level;

++ Re-stickering of old stock is compulsory;

++ Benefit of ITC can also be computed comparing the effective ITC ratio pre-GST and post GST;

++ No methodology was required as benefit was to be passed equal to the amount of tax rate cut;

++ GST on enhanced base price which is paid to the government is also profiteering;

++ Non-availability of legal tender is not a hindrance to pass on GST benefits;

Orders of NAA have, themselves, created a lot of questions, while attempting to answer a few. Certain grey areas for businesses and the way forward is proposed to be discussed along with a brief on NAA orders in the upcoming parts.

(To be continued…)

(The author is a Chartered Accountant and Senior Associate, Lakshmikumaran & Sridharan, New Delhi. The views expressed are strictly personal.)