Anti profiteering under GST

"Profit is fine, Profiteering is not. Don't let someone Profiteer at your expense"

Understanding GST

GST is expected to simplify indirect tax collection, prevent revenue leakages and help realize the goal of one India - one Market. A laudable fiscal and revenue reformmeasure, is slated to go on stream in July 2017. However, like all major reforms, businesses require legal handholding in order to negotiate the initial bottlenecks and incongruities involved in the implementation of GST.

What is Anti- Profiteering?

1. 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.
2. The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, 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 of the goods or services or both supplied by him.
3. The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.

Why Anti-profiteering ?

Wherever GST has been implemented, there has been an initial rise in prices and this has lasted anywhere from six months to just short of two years.

Anti-profiteering is a transitional provision and will be a short-lived concept

Introduced to protect the interest of consumers and at the same time not harming the industry interest.

International practices And Indian context

1) Further, Part-II and Part III of Schedule to Price Control and Anti Profiteering (Mechanism to Determine Unreasonably High Profit) (Net Profit Margin) Regulations 2014 had prescribed mechanism to calculate net profit margin pre-and compared in order to make sure that there is no increase in net profit margin post GST implementation.

2) In Australia too, the Anti Profiteering measures were effected through amendment in existing legislation called “Australia competition and Consumer act 2010 “ . Whereby Sec. 44ZZT had been added to impose restriction as mentioned in section 18 :

*Protection of interest of consumers
*Promotion and sustainability of competition
*Ensuring Freedom of trade among participants in the Indian Markets.

3) Competition Commission of India (CCI) was duly constituted under the Competition Act to take due care of above mentioned objective of the said enactment. Objectives of the CCI is more or less at par with objectives of proposed Anti Profiteering law. Looking to the experience of handing similar nature of task, CCI may be entrusted as the competent authority under Sec. 171 of the CGST Act.

Issues & Challenges

1. Computational Mechanism:

a) Practically it is very difficult to establish one to one correlation between ITC on inward supplies and Tax payable on outward supplies. So ultimately it comes on margins or prices of supply. How the margins and prices are to be checked is a subjective matter. There may be various ways like:

• Profit on product in absolute terms.
• Profit percentage on Cost of product.
• Profit percentage on Sale price.

b) Further apart from benefits in terms of better credit chain. The business organization are going to incur huge cost for implementation of GST on account of installation of new IT systems. Restructuring of operations , redesigning of SOP's Compliances cost etc.

- Whether, the organization can set off it's gains in terms of better credit flow with its Increased cost, before passing of the same to consumer. In other words. ID rules prescribe for maintaining of margins, whether the same is to be maintained on Cost of product level, Gross Margin level, Operational Profit level or Net Profit Level.

Industry should represent before government with it's rationale and demands. However, one think which has to be ensured that rules should be detailed enough so that there will be discretion available to any authority which Leads to corrupt practices.

2. Determination of Price.

One fact needs to be noted that and margins are not solely dependent on taxes. Rather they are only a component of price like any other components. Price determination depends on many factors such as:

Internal Factors

1. Cost of raw material or other component.
2. Predetermined objectives (Higher profit or higher revenue)
3. Image of the Seller (Good will)
4. Life cycle of the product (Initial level may be less priced or even free sample after that there may be increase in price)
5. Credit period offered .

Promotional activities (Heavy advertisement / promotional exp.)

External Factor:

1. Competition
2. Consumers (price sensitivity & purchasing power of buyer)
3. Government Control
4. Economic Condition (Recession)
5. Supply Chain (Longer the chain, higher would be the price)

Price determination of nay product is most complex and continuous process, cycle of which depends on nature of product. If prices or margins are being freezes, on accounts of Anti- Profiteering Measures, then it may be strategic pricing for some products which the companies don't want to share with anyone including tax authorities.

Anti-Profiteering Rule

Anti-profiteering rules are needed as lessons learnt from other countries show that there has been inflation and prices have increased after GST implementation. For example, Singapore saw a hike in inflation when it introduced GST in 1994. It makes it more important for Indian administrators to keep tabs on prices after implementation of GST. India is doing what many countries did: initiate antiprofiteering measures at the retail level to protect consumers from price swindling. Clause 171 has been inserted in the GSTAct which provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from Input tax credit to the consumer by way of commensurate reduction in prices.

The crux of the anti-profiteering rules is

1. If there is reduction in rate of tax on the supply of goods or services or.
2. Benefit of input tax credit is now available under GST Then a registered person must pass on the benefit by reduction in prices

Detailed Analysis

Section 171(1) casts responsibility to pass on the benefit of GST to the recipient for following two aspects:

Reduction of Tax Rate in New Tax Regime

1) For example, eating out has become cheaper under GST (mostly 18% GST as compared to earlier 20.5%). This benefit must be passed on to the consumers.

2) Passing of benefit due to reduction of tax rate, in case of supplies exclusive of tax or for immediate services is not a big challenge. This is because the reduction in tax rate will directly be evidenced by invoices, and the recipient will get benefit of the rate reduction. Such can be seen now in the cases of eating out and travelling through app-based taxis (reduced by 1%).

3) However, in case where contract of supplies is inclusive of taxes, this provision will cast responsibility on the supplier to reduce the price due to reduction in rate of taxes.

4) For example, FMCG items are normally sold on MRP basis or some other fixed prices by retailers. If there is any reduction in rate of tax it has to be passed on to the ultimate recipient. Accordingly, there will be a need to revise MRP or other prices fixed for such supplies.

5) However, if GST has a negative impact on the cost, then prices can be increased. For example: If the output supply was zero-rated in previous regime and also remains zero-rated in GST regime, the business will not get any input tax credit.

6) If the tax rates are increased, tax under reverse charge imposed etc. then prices will increase.

7) For example, domestic LPG was exempt from tax under earlier regime. Now they fall under 5% GST. This will result in an increase in the prices of cooking gas.

Benefit of Input Tax Credit:

1) Almost all industries will be affected with respect to passing of benefit due to better credit chain. In most places, be it service sector, manufacturing, trading, or any specific industry, all are going to get advantage of better flow of input tax credit except sectors having zero-rated output supply. So overall the expectations of anti-profiteering provisions are commensurate reduction in prices of supplies. 2) For example, radio taxis earlier could not adjust the input VAT on office supplies with the output service tax payable. Now, ITC on all inputs can be adjusted against output tax. These benefits are passed on by them in the form of offers and discounts. Similarly, many big stores have GST sales and special offers to pass on the benefit.

The Authority

The Authority shall consist of -

(a) A Chairman

(b) 4 Technical Members (Commissioners of State/Central tax) The Authority will determine the method and procedure for determining whether the reduction in rate or the benefit of input tax credit has been passed on by the seller to the buyer by reducing the prices.

Duties of the Authority- Determine whether the reduction in tax rate or the benefit of input tax credit has been passed on by the seller to the buyer by reducing the prices. Identify the taxpayer who has not passed on the benefit The Authority will exist for 2 years from the date on which the Chairman enters upon his office unless the Council recommends otherwise.

Orders Passed by the Authority The Authority will order

1. Reduction in prices
2. Return to the buyer, the benefit amount not passed on along with 18% interest
3. Payment of penalty and
4. Cancellation of registration

The Authority will pass order within 3 months from the date of the receipt of the report from the Director General of Safeguards. An opportunity of being heard will be given if the interested parties request for it in writing. Period of interest will be calculated from the date of collection of higher amount till the date of return of such amount. If the eligible person (i.e. the buyer) does not claim the return or the person is unidentifiable then the amount must be deposited to the Fund. Interest will be calculated from the date collection of higher amount till the date it is deposited in the Fund.

Confidentiality of information

The parties will provide information on confidential basis. They may be required to furnish non-confidential summary thereof. If, in the opinion of the party providing such information, the information cannot be summarized, then such party will submit to the Director General of Safeguards a statement of reasons why summarization is not possible Cooperation with other agencies or statutory authorities The Director General of Safeguards may seek opinion of any other agency or statutory authorities if required.

Power to summon persons to give evidence and produce documents The Director General of Safeguards, or an officer authorized by him will have the power to summon any person necessary either to give evidence or to produce a document or any other thing. He will also have same powers as that of a civil court and every such inquiry will be deemed to be a judicial proceeding.