Introduction of the good and services tax (GST) was a long-awaited and path-breaking tax reform. The Constitution of India restricts legislatures at the Centre and states from encroaching into the domains reserved for each other. This necessitated a constitutional amendment to permit central and state governments to concurrently levy a common tax called GST on the taxable event called “supply” of goods or services. GST thus integrates various indirect taxes into a unified tax levied at every stage of economic activity with credit of tax paid on the input side (input tax credit or ITC) for set-off against tax payable on the output supply.
Many countries which introduced GST (or VAT) experienced an initial inflationary spiral, after the roll-out. The Indian authorities therefore endeavoured to maintain the current overall tax load (excise duty plus VAT) to avoid price rise and disruption in economic activities, especially those that affect the weaker sections of society, with the likelihood of leading to a public outcry and having political fall-out. This necessitated “anti-profiteering” actions.
The anti-profiteering measure, as envisaged under Section 171 of the Central Goods and Services Tax Act, 2017 (CGST Act) mandates that any reduction in tax rate or benefit of ITC, should be passed on to customers through reduced prices rather than being pocketed by the business as profit. The principal objective of GST has been to combat cascading taxes and the demerits of double taxation, which lead to price rise.
The National Anti-profiteering Authority (NAA) has been duly constituted under the GST law, which consists of a chairman and four technical members nominated by the GST Council. The GST Council will also constitute standing and state-level screening committees. These committees initiate investigations or receive complaints that would trigger the anti-profiteering investigations.
The NAA is empowered to order errant suppliers to reduce prices, return excessive amounts collected (with interest), impose penalty, and cancel registration, where it is satisfied that the supplier has violated the anti-profiteering provisions. The Director General of Safeguards (DGS) has been empowered to issue notices to interested parties, seek the opinion of any other agency or statutory authority, summon any person to record evidence and conduct enquiries.
Anti-profiteering in action
Following the 23rd Meeting of the GST Council, the Central Board of Excise & Customs (CBEC) has issued a press release highlighting its intention to crack down on businesses that do not comply with anti-profiteering provisions. The DGS is reported to have issued notices to FMCG giants, restaurant chains, manufacturers and traders across the country, for being prima facie non-compliant. As part of its investigations, the DGS can rely on the company’s balance sheet, profit and loss account, returns, price list, invoices and purchases, or require parties to produce other information and evidence. The rules grant significant powers to the NAA and authorities working under it.
Practical and implementation issues
While the anti-profiteering provisions have been notified, detailed guidelines are expected. It is unclear whether the calculations will be on the “net profit margin” method as implemented in Malaysia, or the “dollar margin” method adopted in Australia. It is reported that implementation of anti-profiteering measures in Malaysia led to widespread litigation, while Australia’s experience has been encouraging, as sufficient lead time was given for educating stakeholders.
According to Section 171(1) of the CGST Act, “Any reduction in 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”. When goods are sold at the retail sales price (or MRP) printed on the package, it is expected that the MRP is suitably adjusted to reflect the reduced cost, and the CGST Act requires suppliers to mark the revised MRP.
The GST law mandates that reduction in cost and/or benefit of ITC results in “commensurate” reduction in price. In the absence of a clear indication as to what “commensurate” reduction means, resort has to be made to dictionaries, according to which the term means “corresponding in size or degree; in proportion”, “in a correct and suitable amount compared to something else”, “corresponding in size, extent, amount, or degree” or “equal in measure or extent”. If so, does it mean that the entire GST benefit must be passed on, or is it sufficient if the price reduction is in proportion to the actual benefit? Can the supplier choose a pricing strategy at the entity level, unit level, product level or batch level?
In cases where suppliers are enjoying exemption from tax under the earlier regime, they are expected to ascertain the cost reduction on account of ITC available under GST. For example, a motorcar dealer who bought cars on which excise duty was paid from a manufacturer before July 1, 2017, is expected to pass on the benefit of excise duty credit to the customer when he sells the car under the GST regime. Or, a supplier of exempt goods (say, bicycle components) under the earlier regime who can now avail of ITC, and sells these components under the GST regime, is expected to pass on the benefit accrued to him through price adjustments. Simultaneously, a manufacturer of bicycles is obliged to factor the price reduction or additional credit benefit enjoyed by the component supplier, while formulating his pricing strategy.
Although clear guidelines are still awaited in regard to the methodology to be used and clarity is expected on what basis price calculations are made, the government has made it clear that anti-profiteering measures are not intended to bar businesses from making profits, but only to protect consumers from errant businessmen who make undue profits at the cost of consumers. While anti-profiteering provisions inserted in the GST law appear to be stringent, it remains to be seen how they will be monitored and implemented without deviating from their purpose and intent.
The writer is Partner & Head – Indirect Tax, BDO India