NOVEMBER 13, 2020

By Jigar Doshi and Anish Tripathi

THE recent action taken by the National Anti-Profiteering Authority (NAPA) against Starbucks - 2020-TIOL-66-NAA-GST, where it fined them INR 1.04 crores plus 18% interest for not passing on the benefit of GST rate reduction to consumers in the price of their products, has once again brought the focus back to the intractable problem that Section 171 of the CGST Act has become. Not all the facts of the case are in the public domain, besides that the Company increased prices to keep the end-price the same, even though the tax rate had changed, and justified the price increase due to an increase in input costs. This excuse for not passing on the benefit of GST has become untenable. Industry needs to be better prepared to answer questions related to compliance with the stringent provisions of Anti-profiteering.

We have been keenly following developments related to GST since its introduction. In our view, anti-profiteering is the deadliest section in GST, it is not going to go away, and companies need to take it more seriously than they have been doing so far.

Is India Inc. doing enough?

Corporates have been long-advised to not take the anti-profiteering provision lightly, not to believe that this was unnecessary (it isn't), not to pretend that it is temporary (it's not), and most importantly, not to go into a denial mode by believing that the provision is ambiguous (and hence impossible to comply with). Many advisors unfortunately have added fuel to the fire, by further strengthening these misconceptions.

In an ideal world, it would have been preferable if the Govt had not taken a "nanny state" approach towards product pricing, and left it to market forces to ensure that the benefits of GST are passed on to consumers. However, past history in earlier tax regimes showed that this does not happen automatically. Given that the Government did not have any enabling provision for ensuring this (as correctly pointed out by CAG), it was obvious that this would be part of GST. Let us just accept this as fait accompli.

The assumption that this would be a temporary provision has been belied by the fact that the entire infrastructure and enabling rules governing anti-profiteering have been further strengthened. Firstly, section 171 is a permanent section in law, not a rule, and hence will remain in the statute books till removed (which is highly unlikely). The extension of the tenure of Anti-Profiteering provision for another 2 years (now expiring in 2021) makes the intent quite clear. Secondly, the journey towards rate convergence (e.g. merging the two standard rates into one), and including other items in GST (e.g. electricity, fuels) is still not over. Each time a change is made, the anti-profiteering provision will kick-in to ensure that the benefits are passed on, and compliance paperwork will be required.

B-2-C manufacturing companies are at a greater risk of being scrutinized, as compared to others, but that does not mean that B-2-B companies don't need to comply. There are major issues with Services companies, where pricing is not linked to costing methodologies, and hence present a severe problem. Companies have for too long believed that since the methodology has not been delineated and compliance norms are opaque, they cannot comply with this provision. Some ask naïve questions like should benefits be calculated at a company, division, product category, product or SKU level. Pricing is done at the SKU-level, and the section talks about passing benefits accrued in the form of price reductions, then obviously the calculation has to also be done at the SKU level. Recent judgements by NAPA and other state-level advance ruling authorities have only confirmed this in the case of M/s McNROE Consumer Products P. Ltd. and Jubilant Food Works Ltd.

Complying with the provision requires three things, in order - Bonafides, Transparency and Documentation. Many companies have stumbled at the first step itself. There are unverified stories of companies calculating GST benefit at the division-level, and passing it on in the pricing of "fast-moving" products only, or renaming earlier business discounts as "GST benefits passed on as price reductions", etc. The assumption was that the Dept would not be able to differentiate between the two, or challenge it, which has been proved untrue.

The Govt seems to be very serious about ensuring compliance, and is putting severe penalties in place. It makes eminent sense to not only comply, but be seen to have complied, and also be able to pass scrutiny on compliance.

What can India Inc. do to comply better with the Anti Profiteering provision?

A basic set of sequential steps to be taken are as follows:

- Calculate the benefit accrued due to GST, through both rate reduction and additional input tax credit, at the SKU level, and pass it on.

- Keep the pre-GST and post-GST costing / pricing methodologies unchanged, and yes documented. E.g. have a pricing committee that takes decisions and keep detailed minutes, including assumptions made, and calculations relied upon. If material cost variations were earlier passed on say once a year, then club it with the GST benefit and net it off. If not, then don't mix the two.

- Don't club regular business practices like seasonal / volume discounts, or dynamic pricing, with GST benefits that need to be passed on.

- Even if the decision taken was to not make any pricing changes, e.g. if costs went up that offset GST benefits, document detailed calculations, and establish precedence that cost increases were passed on as price increases in the pre-GST regime also.

- Document any delays in making price changes, calculate the impact, and pass it on as a one-time impact on the price.

- Conduct mock audits, because sooner or later, you will get questioned on anti-profiteering, and your team needs to be able to answer questions and demonstrate compliance.

Most companies have done a relatively good job of calculating the benefits through rate reductions, but not on benefits gained through additional input tax credit. This is a lacuna that will cost them heavy, if they get taken up for audit.

Common Misconceptions

Just because you are in a B-2-B business, it does not mean that you are exempt from this provision. The Dept will work its way up the value chain, and failure to comply will make you liable for prices from July-2017! Many B-2-B cos have not complied with the provision as yet, and are risking severe penalties, if and when they get taken up for audit.

You cannot contract your way out of compliance with the provision, which means that even if you have a fixed-price contract, this cannot be a defence against non-compliance. Law overrides the contract each and every time. Although there are no departmental clarifications on this as yet, this is a ticking time-bomb for many companies.

There are issues with services, as they are usually not priced on a "cost-plus" basis. Having said that, Services cos also need to take cognisance of this provision, and make attempts to comply, as the law does not exempt anyone. Inadequate compliance is still better than no compliance at all.

There is an admitted ambiguity on whether GST benefits received from vendors, need to be treated as pass-throughs, to be in turn passed on to customers, or retained as your benefit due to GST. In our view, the section clearly reads "any benefit to the recipient", and not just benefits accrued in the forward supplies made by the recipient. An unbiased reading of this section would suggest that intent of the provision is you should not retain any benefit accrued through GST, either directly (i.e. in your own supplies), or indirectly (i.e. benefits passed on by your vendors in your purchases). The safe position is that cos should maintain a separate record of benefits accrued to them from their vendors due to GST, and cognize of it clearly in the costing calculations, and pass it on. It would be unfortunate to see a future judicial pronouncement on this coming back to bite you.

Conclusion

We have already seen a dramatic increase in the volume of litigation with the introduction of GST. The hearing of about 50 writ petitons filed by majors such as Hindustan Unilever, Patanjali, Jubilant Foodworks, Reckitt Benckiser, Johnson & Johnson, Phillips, Subway and the likes was bunched together and was due to be heard by Delhi HC on November 3, 2020. However, the hearing has been deferred to December 7, 2020. The issues to be decided in the petition include the constitutional validity of NAPA and determining the quantum of profiteering. Once the decision of Delhi HC is pronounced, the matter is set to reach the Supreme Court (either parties are certain to appeal). This shall be an important milestone in the journey of Anti-profiteering provisions and the litigation surrounding it. The future and the past of NAPA, both are at stake; though businesses should certainly not wait for the decision to come out for complying with Anti-profiteering provisions.

The current litigation is just the tip of the iceberg, and many chapters are yet to be written in this story. Companies would be well-advised to review their stance on Section 171 against the touchstones of Bonafides, Transparency and Documentation.

[The authors are Jigar Doshi - Founding Partner at TTMS LLP (TMSL), and Anish Tripathi - Partner at Ethican Advisors LLP. The views expressed are strictly personal.]