Gaps in anti-profiteering policy put businesses in spot of bother

When a panel of state finance ministers led by West Bengal’s Amit Mitra brought out an early version of the goods and services tax (GST) law in November 2016, it introduced a provision that was not there in a previous draft released in June that year.

The provision said in just over 100 words that businesses have to pass on tax benefits to the consumer by way of a ‘commensurate’ cut in prices of goods and services, or face a penalty. When the rules were firmed up in 2017 before the roll-out of the tax reform in July, the scope of the anti-profiteering measure got significantly widened to include a harsh and unforgiving chastisement for defaulters—de-registration of the erring company. Today, anti-profiteering is a key compliance area for businesses with regulatory rigor and potential litigations.

Unhappy customers

The GST Council had made large-scale tax cuts in November, 2017, on items such as shampoo, cosmetics, hair oil and groceries from 28% to 18%, and in July, 2018, on refrigerators, washing machines, small televisions and vacuum cleaners from 28% to 18%. Last December, it further slashed tax rates on 22 items. A government official, requesting anonymity, said that market prices of a large number of products have, however, not come down to the extent of the tax cuts, and the central and state-level panels are looking into profiteering charges following hundreds of complaints in recent months. Some of the complaints are against multiplexes not lowering movie ticket prices and prices of auto components and power banks not getting reduced at the retail level following the 22 December tax cuts.

Experts said the anti-profiteering law ensured that the benefit of GST rate cuts is passed on to consumers, but flaws in its framework are leading to litigation.

Trigger for litigation

Businesses, which were pulled up by National Anti-profiteering Authority (NAA), have moved courts. Hindustan Unilever Ltd (HUL), which have allegedly profiteered to the extent of ₹383 crore, got an order in January from the Delhi high court restraining the NAA from taking any coercive action before the case is settled.

“As the matter is sub judice, we have no specific comments to offer on your query,” a HUL spokesperson said, responding to questions emailed on Tuesday.

“Businesses do not mind passing on the benefit of GST rate rationalization to consumers. The challenge they encounter, however, is on the precise modality in which the benefits were to be calculated and passed on to the end customer,” said Abhishek Jain, tax partner, EY. The law does not specifically provide for whether the benefit has to be passed on at a business entity level or at a product category level, or at a stock keeping unit level, said Jain. Some forms got caught on the wrong side of the law possibly because of this and it may only get settled in courts after protracted litigation, he added.

NAA is now expected to come out with final orders on 8-10 cases. One key difficulty faced by businesses is to ensure that prices have to be cut on each product at the appropriate measure as warranted by the tax cut. Lowering the price more than required by the tax cut on one product does not mean the company can avoid cutting the price at the required level in case of another. It is not sufficient to prove tax cuts have not boosted the company’s bottom line. Each consumer should get the tax relief in terms of price reduction at the right measure. While businesses tend to take extra care to remain on the right side of the law, long supply chains and products already at different stages in that chain make it hard for them to instantly bring to effect a reduction in price that the anti-profiteering watchdog demands. Absence of guidelines on how to respond to tax cuts, too, has added to the challenge businesses face.

Emerging problems

Experts also said the withdrawal of benefit of input tax credit for certain segments, such as restaurants and under-construction properties has added to the already complex compliance regime for businesses. Withdrawal of input tax credit forces businesses to pass on the tax cost to consumers, who in turn feel the base price has increased, leading to complaints, explained Pratik Jain, partner and leader of indirect tax, PwC India. In these two sectors, the GST Council lowered the tax rate and withdrew the input tax credit facility to give relief to consumers.

“Initially, anti-profiteering law was purported to be a light-touch regulation aimed at ensuring deterrence. Gradually, its application has become widespread,” said Jain. Changes in tax policy mid-way through a property development project, such as withdrawal of tax rebates, only adds to the complexity businesses have to deal with, he said.