Two cheers for GST’s anti-profit wing

The anti-profiteering clause of the GST Act is now in the news, with some companies under the lens for allegedly not complying with it. The cases that have come to light have been intriguing. They show an increase in base price to offset the tax reduction. However, companies argue that these increases are not without basis.

Compared with some other Sections of the GST law, Section 171 is not a very lengthy one. The first clause of this Section states that 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.

As per the requirement of the second clause of the Section, a National Anti-Profiteering Authority (NAA) was set up to look into cases of possible anti-profiteering. Till date, around 100 cases of anti-profiteering have been referred to the authority. The cases referred include high-profile ones such as Hindustan Lever and less prominent ones such as the price of hara bhara kababs not being reduced after a reduction in the rate of GST. There have also been some frivolous cases, such as the price of cars not having been reduced after the introduction of GST. Though Section 171 appears straightforward, there have been plenty of issues in implementing it.

Procter and Gamble

Recently, news reports have stated that the GST profiteering investigation arm has found leading FMCG firm P&G India guilty of not passing on GST rate cut benefits to the tune of about ₹250 crore through a commensurate reduction in prices. Based on a complaint filed before the standing committee, the Directorate General of Anti profiteering (DGAP) investigated the books of accounts of P&G India pre- and post-November 15, 2017, and concluded that the consumer goods manufacturer had not lowered prices of certain of its products despite a cut in GST rate to 18 per cent from 28 per cent.

The Goods and Services Tax rates on about 178 products were cut by the GST Council with effect from November 15, 2017. The rate on washing powder, shampoo, cosmetics and dental hygiene were slashed to 18 per cent from the highest slab of 28 per cent. As per GST anti-profiteering rules, companies have to pass on the benefit of reduction of taxes to consumers by way of commensurate cut in product prices.

However, there have been complaints from consumers that the firms have increased the base price of products and then charged the lower GST rate, thereby keeping the MRP of products the same, pre and post-tax rate cut.

Once a profiteering complaint is received against a company, the DGAP has the powers to look into the books of accounts and see if the benefits of tax rate cuts have been passed on with respect to other products manufactured by the company as well. After studying the documents, the DGAP gives its report to the NAA for further action.

If the NAA finds a firm guilty of profiteering then the amount profiteered has to be refunded to consumers by the company. In case where the consumers cannot be identified, the amount has to be deposited into the consumer welfare fund of the Centre and States.

Dominos Pizza

The Dominos Pizza case illustrates how the anti-profiteering provisions work and also what is wrong with them. A consumer Kiran Chimirala had one stuffed garlic bread and one medium veg pizza at Dominos Pizza in Bengaluru on October 20, 2017. He paid ₹152 and ₹519 for these, respectively. Chimirala repeated the same order at the same outlet on November 19, 2017, and was glad when he noticed that he had to pay ₹146 and ₹509, respectively.

However, on a deeper inspection of the invoices, he stumbled upon what had happened ( see table ). Chimirala e-mailed the anti-profiteering authorities who authorised an investigation. The DGAP was of the view that the increase in the base price was only for the purpose of off-setting the reduction in the rates of GST.

Dominos Pizza stated that they had to increase the prices since the 12 per cent bracket came with eligibility to take input tax credit which the 5 per cent rate did not permit. The increase in base price was primarily to counter the impact of increasing costs and non-availability of input tax credit.

The NAA toed the line of the DGAP and calculated the total amount of anti-profiteering at ₹41.43 crore. This amount was to be distributed equally between the Central Consumer Welfare Fund and the Consumer Welfare Fund of different States.

More importantly, Dominos Pizza was directed to refund an amount of ₹5.65 to Chimirala along with interest. The NAA passed a similar order in the case of Unilever for a much larger amount.

Input tax credit

At first glance, it does appear that increasing the base price of products just after a reduction in the rates of GST is a cardinal sin and would be certainly be tagged as anti-profiteering. However, it is a fact that reduction in the rates of GST was accompanied by the denial of ITC. At the end of the day, every business seeks profits and would have devised strategies to maximise them.

Artificial conditions such as denial of ITC impact costs. In addition, though there were some provisions in the CGST Act and Rules on anti-profiteering, no notifications were forthcoming on how to calculate the amount of anti-profiteering.

In their arguments, Dominos Pizza cited the examples of Malaysia and Australia where the anti-profiteering provisions included those on how to calculate the amount of anti-profiteering using the net profit margin or the net dollar margin rule respectively. The guidance given for anti-profiteering in India is more like the description of a process.

During the first year and a half of GST, rates were chopped and changed ever so frequently. Large entities with operations in multiple locations would need time to adjust the pricing in their systems. To ensure that the customer is aware of the new prices, entities were permitted to affix an additional sticker for declaring the reduced MRP on the pre-packaged commodity.

In the absence of specific guidance, anything that the NAA considers anti-profiteering will pass muster. Anti-profiteering laws were supposed to last for two years after the rollout of GST. Companies will be hoping that this deadline is taken seriously.

The writer is a chartered accountant