Anti-Profiteering in Goods and Service Tax

[Mallikarjuna Gupta]

Goods and Service Tax is implemented in India from 1^st July 2017 and the major feature or the advantage of GST is the availability of seamless credit of taxes across the supply chain and rationalization of the tax rates. To ensure that the trade and industry passes the same to the end consumer, the Government has introduced the Anti-Profiteering provision wide section 171 of the CGST Act 2017. As per Section 171, sub-section (1) “Any reduction in the 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.”.

In the erstwhile tax regime, input tax credit was not available for all the taxpayers for all the taxes like Central Excise taxes input tax credit was not available to a distributor or a retail trader and similarly Service Tax input credit was not available to the VAT taxpayers. This has resulted in an increase in the prices being paid by the end consumer. Higher prices mean, lower purchasing power to the common man and inflationary pressure. In GST, the taxpayers can take input tax credit on all their inward supplies which are used in the course or for the furtherance of business for the taxes under GST. This translates into a lower cost of production of goods or services means the prices of the goods and services are supposed to be coming down.  It is also based on the experience of the VAT, where the input tax benefit was not passed to the end consumer and it is clearly stated in one of the reports given by CAG.

Some of the taxes which are subsumed in GST, as a result of this, the prices have to be reduced. Apart from the above taxes, as part of the transitional provisions, the taxpayers who are not registered under erstwhile taxes and having duty paid documents are also eligible to take input tax credit. The provisions are given in Sub-section 3 of Section 140 of the CGST Act 2017. 

Profit is the reward for the risk undertaken by the entrepreneur and it is legitimate but antiprofiteering is unjust enrichment of customers benefits. Anti-profiteering is not a new concept in India or across the globe, it is time-tested and implemented across the globe at one point in time and in India also we had similar provisions in the state of West Bengal. We have taken a clue from various countries which have implemented GST / VAT Across the globe and based on that Anti-profiteering provisions are given in the law. There are various models followed governments across the globe and the two major ones are

1. Net Profit Method – implemented and followed in Malaysia, in this model the net profit percentage is frozen pre-rollout of GST and the same is maintained post-rollout. This ensured that the input tax credit benefit is passed on to the end consumer.

2. Unit Price Method – implemented and followed in Australia and in this, the unit profit per unit is pre-determined and the same is maintained post-rollout. Also, there was a mechanism to show the MRP of the product Per GST rollout and post GST rollout. This helped the price control very effectively.

Indians are also not new to the anti-profiteering is not new, we had a similar provision in the West Bengal known as “The West Bengal Anit-profiteering Act, 1958”. As per this act, any dealer who makes profiteering by way of selling the notified goods at a higher price can be punished with rigorous imprisonment up to two years or fine or both. There is also a provision in this act which prosecutes the buyers also.

The reduction in tax rates and availability of the ITC can be explained in the following illustration with prices pre-GST and Post GST

The illustration is based on the assumption that the prices will remain constant but in the real world, it is driven by demand and supply along with other factors which are beyond the control of trade and industry. To address such cases there is no provision in the law. A similar provision is there in the Australian anti-profiteering where prices can be escalated by 10% to factor such cases.

A few days back there were bills which were going viral in the social media that the prices have been jacked in spite of the reduction in the tax rates, this can be amounted to anti-profiteering by many in the public domain, the real fact will be known only after the investigation are completed by the concerned authorities. 

To ensure that the trade and industry pass the benefits of reduction of tax rates as well as the additional input tax credit benfit, the government has notified the Anti-Profiteering Rules in Chapter XV from Rule 122 to 137 of the CGST Rules 2017.  The government has also released a form for filing of the complaint. Though the form is released for the filing of the complaint, it is very complex and the common man cannot file it as it asks for the breakup of the taxes under Central Excise, VAT etc., which the end customer will not be aware of it. The format required for filing of the complaint if any by the end consumer has to be revisited by the respective authorities.

The format of the existing form for reporting Anti-Profiteering by the common man or end consumer to be filed for Anti-Profiteering released by the Government

The   complaint will be rewied by the State level Screening Committee, which consists an officer nomimnated by the State Government and the Central Govenrment each. Once the  State level Screening Committee  finds a complaint priama faice a valid one, it is forwared to the Standing Committee. The State level Screening Committee  has to dispose of the complaint within two months from the date of receitp of the complaint.

The Standing Committee, evaluates all the complaints received from the State level Screening Committees and if it finds evidence of the supplier not pasing on the benefit of the tax rate or the benefit of the Input Tax Credit, the complaint is forward to the Director General of Safeguards for conducting a proper investingtion and the confirm the same. The complaint has to be investigated by the Director General of Safe Gaurds within a period of three months and if  addiontal time is required, the same has to be extened by the Stannding Committee for another period of maximum   three months. 

Once the investigation is completed by the Director General of Safeguards, the report is forward to the National Anit-Profiteering Authority (NAPA). The NAPA consists of 5 members, one of them is the Chairman and the other four are Technical Members. NAPA has to conclude on the complaint received from the Director General of Safeguards within a period of three months from the date of receipt of the report.

The NAPA will give an opportunity to for both the parties for hearing and after that it confirms the benefit is not passed on, the order is issued with any of the following recommendations

1. the reduction of the prices
2. Ask the registered taxpayer to return the execs amount charged with 18% interest
3. Can impose penalty
4. Can also cancel the registration of the taxpayer.

In the case where the excess amount charged is not found to be practical to refund to the individual buyers, the same will be transferred to the Consumer Welfare Fund and this fund will be used for educating the common on the GST.

Already notices have been issued by the Director General of Safeguards, after the complaints have been confirmed by the Standing Committee. The Director General of Safeguards, in its complaints ask for the following information

About 150 plus complaints have been received and the Director General of Safeguards is investigating the them.

The Government must have done a lot of deliberations before brining in the law under GST for Anti-profiteering. The dynamics of our country are different from the other countries and the same may not work here. We can either take one of the best model implemented or have a separate model which suits our diversity. Here are few points which can be considered by the government again

1. Have dual MRP method of prices one pre-GST and another Post GST, as this will give more transparency to the consumers. Similar case for tax rate reductions.
2. For the benefit of the trade and industry, there should be a provision for including the price increases also which are beyond the control of the trade and industry.
3. The government can also monitor the same with the transaction data it has from the monthly returns filed under GST for the price comparison.
4. The industry should also maintain the proper information for support of the price determined by them and should be reviewed from time to time considering the tax rates impact.

It is really a herculean task but not an impossible task to determine the reduction of the cost on account of additional ITC in the supply chain, reduction of taxes and taxes subsumed in GST.  Many of the taxpayers are of the assumption that there is no change in the pricing as they were taking ITC in the erstwhile tax regime and now also, but they have to look beyond and then only come to a conclusion. The reduction in the MRP can be used and widely publicized as in the Australian Model where it is required to show the pre-GST and post GST Prices. Though display of dual MRP is not a mandatory feature in GST, the same can be used and shown predominantly on the goods. Adhering to the provisions of the anti-profiteering is also part of the corporate governance.

It can be explained with a small illustration, A Ltd and B Ltd are two manufacturers of a health dink brands H and I.  A decided to reduce the price of the product H and use the Australian Model of dual GST and whereas B Ltd has not reduced the price as it did not consider the same to be required. In the departmental stores both the brands H & I are placed in the same rack. When the customers walk in to buy the health drink, he is attracted to brand H as he sees the price is being reduced and also following the compliance even though he is using the brand I for a long time. The loyalty of the customer shifts from the brand I to brand H of company A Ltd.

This is one of the products I have seen in the departmental store for the reduction of the GST, this is how this company is publicizing the price reduction.

It is a known fact that cost of acquisition the customer is very high and retaining the customer is also high. Here the cost benefit analysis is also not required as it is a statutory obligation and also as part of the corporate governance it has to adhered.

Anti-profiteering is not to be seen as anti-business but it can be used as a tool to improve the market share and profitability on account of volumes and lesser spend on the marketing costs. This benefit is available only for the corporates who act proactively and the early adopters.

Industry should follow these points to avoid receipt of notices from director general of safeguards

1. Pass on the benefit of the tax rate, where ever applicable, in case of reduction of tax rates, the MRP should be reduced accordingly
2. Pass on the benefit of the additional ITC available under GST and reduce the MRP if required.
3. While purchasing the goods or services, re negotiate with your suppliers for the additional benefit of the GST credit
4. Whenever the government reduces the tax rates during the GST council meetings, reduce the MRP and also ship the stickers to the dealers and distributors if they are hold the stocks. If possible use the dual MRP, like new MRP and old MRP, this will improve the credibility in the market and increases the sales automatically. 

Profiting is good but anti-profiteering is bad and the trade and industry should pass on the benefits of the GST to the end consumer. The role of the professionals is in this aspect is like a double-edged sword, they can neither take a stand on behalf of the trade and the industry or the consumer or the Government.

Autor can be reached at [email protected] for any further clarifications or queries.

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