India: Anti-Profiteering Mechanism And Commensurate Price Reduction - A Fine Balancing Act

Last Updated: 21 December 2017
Article by Shikha Bhardwaj and Aseem Chawla

Sometime back social media was abuzz with before and after pictures of invoices of some goods and services, showing price increase immediately after decrease in the rate of GST. This ripple was created when GST Council in its meeting held at Guwahati, reduced rate of GST on host of goods and services, including restaurant services.

The Government in the meanwhile acted equally swiftly to form National Anti-Profiteering Authority (NAA) to operationalise anti profiteering provisions contained under GST and NAA received a cabinet nod, without any further delay.

The NAA is responsible to decide the methodology and procedure for determination as to whether the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in prices.

As widely reported by print and electronic media, a strong emphasise has been put forth in passing on the benefit of rate reduction and abide by anti-profiteering provisions of GST legislation.

The FMCG sector is most likely to get the heat due to rising pressure from all quarters alike to reduce MRP.  Amongst other, one of the challenges before FMCG sector is changing MRP on the old stock already lying with distributers and retailers, without any specific guideline to measure the quantum of price reduction they are required to make under law.

Anti-Profiteering

GST is levied only on the value added by the supplier at each leg of the supply and this is achieved through the concept of input tax credit. It can be explained by way of illustration: Restaurant service provider incurs expenses such as rent, raw material etc. on which he pays GST, such GST paid to the landlord and his dealers is input tax credit for him. Thereafter, when he collects GST on his own services, he is allowed to set off the input tax credit from the GST liability and pay the rest to the Government. Hence, more input tax credit, less tax the restaurant owner pays to the government and vice-versa.

Accordingly, increased input tax credit and reduced rate of tax (provided other factors are constant), both should lead to commensurate reduction of prices, as an antiprofiteering measure. However, what would constitute as 'commensurate reduction of prices' and its quantification has not been explained yet, either under legislation or separate guideline.

Anti-Profiteering Mechanism

Antiprofiteering measure envisioned under Section 171 of the Central Goods and Services Tax Act, 2017, enjoin reduction in rate of tax on any supply of goods or services or the benefit of input tax credit should be passed on to the recipient by way of commensurate reduction in prices.

The object of antiprofiteering measure is to mitigate inflationary trend generally expected, post GST implementation.

In order to operationalise the aforementioned measure, India has adopted a three-tier structure for the investigation and resolution of anti-profiteering complaints from consumers.

State-level screening committees and a standing committee at the national level will receive complaints. Post screening the committees will refer the complaints to the Director General of Safeguards for Investigation. The Additional Director General of Safeguards under the CBEC (Board) shall be the Secretary to NAA.

The investigation report may then be taken up by the National Anti-Profiteering Authority for a final decision. The NAA shall be a five-member committee consisting of a Chairman and four Technical Members. NAA has a sunset period of two years from the date Chairman assumes office, unless the Council recommends otherwise.

India Inc. in Dilemma

Government is yet to come up with some concrete guidelines for the suppliers to ascertain their eligibility of 'commensurate price reduction'.

During the formation of the GST legislation and even after implementation it was widely publicised that GST would be one tax with more input tax credit to the companies and less tax burden. However, keeping in view the socio-economic conditions of India, it was not possible to arrive at one rate of tax applicable on a food item and a luxury car alike. Hence, we got different taxes which is a minefield for litigation on classification, much to the dismay of suppliers. Further, introduction of anti-profiteering measure in GST legislation has been making suppliers uncomfortable since its inception, due to apprehension of plausible witch hunting by the taxman.

Though, anti-profiteering measure makes sense for a country like India, with a large population of gullible consumers who might not understand the dynamics of GST and may get duped easily, however, for the sake of balancing of interests, it was also imperative to have a proper guideline for the suppliers to ascertain their liability of 'commensurate price reduction' under GST legislation.

GST on restaurant services is decreased to 5% with effect from 15 November 2017, which leads to an obvious expectation for reduction in prices. However, the twist in the tale is that they are now denied input tax credit, therefore making it difficult for some to pass on the benefit.

Even after five months, the Government has not unveiled the guiding policy for anti-profiteering measure. The Government cannot solely rely on complaint based assessment machinery, devoid of any guidance. It is very important to carefully sensitise and guide the tax department conducting such enquiries, so that it does not lead to witch hunting.

India is expected to adopt a product-specific approach to impose anti-profiteering provisions, much like the Australia, but how it will take the shape is yet to be seen. Under the said approach, the suppliers are not allowed to reduce prices of only slow-moving products in its portfolio while keeping the fast-moving ones expensive. However, it would be difficult to ascertain the product wise reduction of prices due to increased input tax credit. Suppliers seek some flexibility in the rules, since each company has its unique cost and margin structure.

Learnings from Australia

Australia introduced GST on 1 July 2000, whereas GST implementation had a three-year transition period from 1 July 1999 to 30 June 2002. The Australian Competition and Consumer Commission (ACCC), was made responsible for observing the price fluctuations in response to GST and for taking action against businesses found inconsistent with price adjustments with the GST rate changes.

The ACCC undertook various measures as means for incorporating checks and balances on the businesses. It established national telephone GST price hotline to hear consumer complaints and business, disseminated a detailed compliance guide, "Small Business Pricing Kit" to assist the small businesses, distributed a publication titled "Everyday Shopping Guide with the GST"- contained information on expected price movements for 185 common consumer goods and services over the six months from the date of introduction of GST. Further, ACCC invited corporates with turnovers exceeding $100 million to offer a Public Compliance Commitment (PCC) to the ACCC on a voluntary basis, stating that the company is committed to comply with the ACCC's price exploitation guidelines.

The ACCC conducted quarterly surveys to collected prices from retail outlets and supermarkets for a range of goods and services, both before and after the introduction of GST, to identify areas of potential price exploitation.

The ACCC banned businesses from encouraging consumers to make buying decisions before the implementation of GST by way of misleading advertisements claiming price would increase as a result of GST, though in reality it may come down. In India no such measure was adopted, and all major businesses invariably sold their stocks to consumers in pre-GST sales.

The ACCC had power to seek penalties before the federal court for breach of the price exploitation provision by businesses and individuals. The court could impose penalties of up to $10 million and $5,00,000 per offence for companies and individuals, respectively.

Indian Context

In India, the anti-profiteering administrative structure and a three-stage mechanism itself was rolled out just 10 days before the GST implementation. Whereas, ACCC guided businesses and consumers both, regarding price monitoring mechanism for complete one year of transition period before the introduction of GST.

Further, in Australia, compliance guide to small businesses and information on the expected price movements for common goods and service was released a month before the introduction of GST, followed by price exploitation guidelines meant for the businesses and the first retail price survey was conducted five months before the introduction of GST.

In stark contrast, India did not even have the nodal authority for enforcement of anti-profiteering measure up until recently i.e. five months into GST regime and there are no concrete guidelines as of now on measurement of 'commensurate price reduction' in case of lowering of GST rates and/or increase in input tax credit. Resultantly, stakeholders are presently ill-equipped to comply with and make use of the various provisions under the anti-profiteering.

It has been observed that the price impact of VAT/GST is mostly felt in the beginning of GST implementation and later, non-tax factors start influencing price changes. Hence, it was utmost important that the consumer should have been apprised about expected price changes post GST implementation and accorded speedy redressal of their complaints in the initial phase of GST implementation.

Lack of detailed guidelines so as to lead the businesses to arrive at 'commensurate price reduction' is creating an apprehension of era of socialism, controls and harassment. To resolve this issue, a detailed compliance guide is the need of the hour and an anti-profiteering imperative.

As per the Central GST Rules 2017 (CGST Rules), NAA is empowered to impose penalty on companies that are found non-compliant with anti-profiteering provisions, However, no such specific power to impose penalty is bestowed upon NAA under Central GST Act, 2017 (CGST Act). NAA is only empowered by Central Government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price. Therefore, vires of penal authority granted to NAA under CGST Rules may be challenged leading to litigious situation. Further, the CGST Rules make it a duty of the NAA to order for price reduction, reversal of the amount, imposition of penalties and cancellation of registration, if the complaint is found valid, however, in what order these measures are to be granted depending on the gravity is not clear.

Moreover, it is incomprehensible that why a provision of cancellation of registration has been prescribed and what would be the fate of liability of collection and payment of GST by aggrieved registered person in such an event.

Takeaways

Antiprofiteering may become a looming danger over Government, wherein it runs the risk of developing trust deficit with the stakeholders and on the other hand may open a minefield of litigation. Moreover, it does not help in the least that the detailed guidelines and handholding is absent in the whole endeavour. Instead, the government has been issuing strong warnings to various industries such as restaurants owners and others.

Now that NAA is in place, it is required to come up with a concrete methodology unique to Indian markets, for antiprofiteering measure it can to learn from best practices from around the world and come up with its unique set of modus operandi suitable to Indian needs. India is a highly plural society with diverse needs thus, sensitized balancing of interests is desired.  NAA shall be required to resort to balanced approach and understand the predicament of the market players and seek out the defaulters in a fair and neutral manner.

NAA has a tight rope walk ahead where at one hand it has to safeguard the interest of consumers and on the other hand restrain itself from becoming another raison d'etre of harassment and an impediment in the way of ease of doing business, therefore, balancing of interests, is the key. 

GST legislation is beyond doubt a progressive step towards a simpler tax regime, however, hasty political decisions and ambiguous drafting did dampen the initial sentiment and the course correction is on its tactics way albeit in piece meal, one can only keep its fingers crossed in hope!!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shikha Bhardwaj
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions