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.

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Shikha Bhardwaj
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