Indian businesses threatened by anti-profiteering notices

It’s been about six months since the Goods and Services Tax (GST) rollout in India. Barring some initial hitches and agitations, things appear to be settling down. The government continues to introduce various tax reforms, such as reduced tax rates and filing extensions, in an effort to ease the transition for businesses. 

Amidst the relaxations, however, the government seems to be taking a strict stance on anti-profiteering. The National Anti-Profiteering Authority (NAA), charged with keeping an eye on unfair profit-making activities by businesses, has sent non-compliance notices to several big and small players.

Why did the government introduce the anti-profiteering clause?

A study of various countries suggested that, for short periods immediately following GST implementation, prices of commodities and services rise. When these prices rise, overall inflation increases, thereby defeating the benefits of GST reform.

To curb short-term price increases and any resulting inflation, the government of India introduced an anti-profiteering clause in the GST Act to keep an eye on prices pre- and post-GST implementation.

What is the anti-profiteering clause?

Section 171 of the GST Act describes the anti-profiteering clause. According to that section, if there is any reduction in the rate of tax on the supply of any goods or services, or if the company avails the benefits of input tax credit (ITC), then it must pass on such benefits to consumers by way of reduced pricing.

For instance, suppose a particular product taxed at 14 percent under VAT is now taxed at 5 percent under GST. The anti-profiteering clause directs the company to pass the benefit of this tax rate reduction to consumers by reducing the price of the product.

The anti-profiteering clause also expects companies to pass the benefit of ITC to consumers. Take, for example, a restaurant that pays rent to a landlord, or purchases raw materials from various vendors on which it pays GST, minus ITC. When the restaurant then supplies services and food to customers, it charges customers GST on such supply. Out of the GST the restaurant charges customers, however, it should deduct the amount of ITC it received for the purchase of rent or raw materials.

Because there is a seamless flow of credit under GST, the restaurant must pass the benefit of any ITC on to consumers by reducing the price of food and services.

Companies that have already received anti-profiteering notices 

The Directorate General of Safeguards (DGS), which is responsible for checking whether companies are passing on the benefit of reduced tax rates and ITC to consumers, has sent anti-profiteering notices to Hardcastle Restaurants (the company that runs McDonalds restaurants in west and south India), Lifestyle International, Honda Motor, and Hindustan Unilever Limited. (Source: Live mint)

Uncertainty in guidelines

Although government has introduced these anti-profiteering rules, until now they’ve only spoken about the constitution of the committee and the manner in which they will enforce anti-profiteering measures.

The government has yet to release any guidelines regarding what it deems to be acceptable “price reductions”. How the government will value the impact of GST benefits remains uncertain. Also, there are several factors at play in determining the price of a product. The impact of GST on each such factor needs to be calculated first in order to determine the actual and total impact of GST on any particular product, and any benefits companies may realize from GST.

Demands by industry

The Confederation of Indian Industry (CII) is now demanding clear guidelines under anti-profiteering measures. The CII has asked government to compare the price of each product under the VAT regime with prices since the GST rollout before determining corporate liability under anti-profiteering measures. 

Industry isn’t very happy with the anti-profiteering notices that tax authorities have sent to many firms, suggesting that tax authorities give companies more time to prepare and adopt the anti-profiteering measures. Some Big Four companies have also expressed ambivalence about any mechanism that checks whether they are passing on benefits to customers or not. 

What companies are doing now 

In an attempt to show compliance with the anti-profiteering clause, companies that cut prices are placing revised MRP stickers next to original MRP stickers on product labels to show consumers the difference in MRP. Companies such as HUL are also advertising on a large scale to make people aware of price cuts.

In addition, many companies are seeking refuge from tax authorities by knocking on the doors of legal experts. 

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