APRIL 22, 2020

By Anshul Mathur, Partner & Akash Mittal, Associate, Lakshmikumaran & Sridharan, Attorneys

HISTORICALLY, many countries that have introduced VAT/GST witnessed a spurt in inflation.  The anti-profiteering measure was introduced in GST to prevent such a situation in India.  These provisions mandate that a business may profit but must not 'profiteer' on account of taxation.

Section 171 of the CGST Act provides that a ny benefit which accrues in the form of an additional tax credit or rate reduction should be passed on to the recipient in the form of commensurate reduction in prices.  Given the skepticism over introduction of this provision, it becomes relevant to understand the international position in this regard.   

While Australia followed a unique "one-dollar" methodology, where, if a company is making a dollar worth savings on a product, then such saving has to be passed on to the end-consumer. Secondly, a pricing rule was also put in place which stated that no price increase should be more than 10% due to increase in the rate of tax. In Malaysia, the net profit margin methodology was adopted wherein a prescribed formula for the determination of unreasonably high profits for the limited time-frame was laid down.  It must be noted that GST has been rolled back in Malaysia.   

Unlike other countries, the Indian GST law does not provide any procedure or mechanism for calculation of 'profiteering' amount.  Though the plain objective was to steer clear of inflation,  the absence of clear guidelines opens up a Pandora's box of questions.  

The most fundamental question that remains unanswered even after two years of GST is how to calculate the profiteered amount?  Whether the anti-profiteering analysis is required to be done at entity level or product level? This dilemma is faced by businesses having one product that is earning super-normal profits whereas the entity as a whole is running into losses.  

It is unclear whether the requirement will be met if additional quantity of the product is supplied for the same price.  Though this proposition has been tested before the anti-profiteering authority 1, there is no settled principle to follow.   

Let us consider a situation where the rate of tax has increased in GST but certain input tax credit avenues have opened up for a business. Whether the profiteering has to be examined by taking the cumulative effect into consideration? A decision 2  of the anti-profiteering authority allowed the factoring of  loss of input tax credit while determining the net profiteered amount. Can such decision be used as precedent to calculate the profiteered amount?  

What about cases where the benefit amount is impractical to pass on? Say, the net benefit is merely 20 paise per product. How will the customer get the benefit in absence of a valid legal tender? Can the business be forced to reduce prices by rounding off to the nearest 50 paise and eventually suffer a loss of 30 paise from its own margin?  

It is interesting to note from various orders of the anti-profiteering authority that the benefit is being calculated on the invoice value of the supply i.e. inclusive of GST element. How can a taxpayer be accused of profiteering to the extent of GST which has been duly collected and deposited with the government?

Often the authority is keen to apply 3  the method of calculating the benefit for one business to all other players active in the same sector. How far is this one-size-fits-all approach justified with the dynamic business practices followed by different players in the industry?  

The fundamental gaps in implementation of anti-profiteering provisions need to be addressed urgently, more so now that the tenure of the anti-profiteering authority has been extended by two more years i.e. upto 30 th  November 2021.    

Moreover, the language of Section 171(1) of the CGST Act does not prescribe a termination of the applicability of the said provision.  Does this mean that one has to comply with this provision even after the tenure of anti-profiteering authority ends?  

It is also noteworthy that the CGST Rules do not contemplate appointment of any Judicial member as a part of the anti-profiteering authority. The validity of the anti-profiteering authority stands challenged in a writ petition filed before the Hon'ble Delhi High Court.  

Though the intent behind introduction of anti-profiteering provisions was clear, the absence of proper guidelines for ensuring compliance have put the businesses in a vulnerable position. An allegation of profiteering not only has a fiscal implication but also impacts the reputation of the taxpayer. Thus, the trust deficit between the businesses and tax administration on this subject needs to be reduced to ensure that the key purpose of anti-profiteering is achieved.   Suitable clarifications from government will help to dispel confusion and bring certainty for taxpayers.?  

[The views expressed are strictly personal.]

1. M/s Hindustan Unilever Limited - 2018-TIOL-19- NAA-GST) & Sharma Trading Company - 2018-TIOL-05-NAA-GST.

2. Hardcastle Restaurants Pvt Ltd - 2018- TIOL- 13- NAA-GST

3. M/s Pyramid Infratech Private Limited - 2018-TIOL-06-NAA-GST