Opinion: What’s behind spurt in anti-profiteering litigation under GST

The movement to a goods and services tax (GST) had led to retail inflation in several countries and hence, legislation in India was introduced with a provision to protect consumers. Section 171 of the CGST Act, 2017 makes it mandatory for businesses to pass on the benefit of any rate reductions and any increase in input tax credits to consumers. While there were some cases of a reduction of rates when GST was introduced in July 2017, there were significant rate reductions, in many cases to the tune of 10%, that followed in the subsequent months on many products. The input tax credits overall increased for most businesses as state and central taxes, which were kept in separate pools earlier, were merged in the GST. Undoubtedly, therefore, there was a need to pass on the benefits to consumers in case of several products.

However, while many businesses would have liked to pass on the benefits to the consumers, they were constrained by two important factors. Legislation did not prescribe any methodology which could be uniformly followed by businesses to determine the emergence of a benefit or otherwise. In addition, businesses were not informed whether an increase in raw material or other costs could be offset by the reduced tax amount, keeping the consumer price constant. It is pertinent to note that during the period when GST rates have been reduced, many businesses have seen an increase in their input prices due to the increase in the oil prices and the depreciation of the rupee.

These factors have led to a situation where the government feels that some businesses have not been doing enough to pass on the benefits to consumers, while many businesses feel that the absence of an agreed method to determine incremental benefits, if any, exposes them to a subjective case by case approach by the authorities. We have recently seen a spike in litigation emanating from such issues and in addition to the decisions pronounced by the National Anti-Profiteering Authority, some matters have reached the high courts as well.

In many cases, the absence of a practical approach has resulted in the emergence of litigation. Some businesses sought to increase the quantity supplied at the same price, commonly referred to as grammage increase, as a method to pass on the benefit to the consumer. Other businesses sought to reduce the price on certain pack sizes while keeping the price constant on other pack sizes. Both these practices were on account of the difficulties in changing the price and packaging and the legal tender issues that would emerge if a product was priced at, say, ₹4.65 per pack. Products that were subject to the MRP regime also required a lead time for changing the existing packing material, making arrangements for stock with distribution intermediaries etc. Some businesses did not increase the consumer price despite significant cost headwinds, hence, by implication, they were passing on the benefits of reduced taxes to the consumer.

Many of these issues have not been appreciated by authorities, leading to litigation in the nascent law. Since Section 171 came into force on 1 July 2017, with a two-year sunset clause, there appears to be an anxiousness in deciding cases before 30 June 2019. Hence, several businesses have had to appear before the authorities with voluminous amount of data demonstrating their adherence to the law. The limited amount of time, accompanied by divergent business practices, make it difficult for the authorities to appreciate the nuances of each matter. The computation of the quantum of benefits, in itself, is a complex process requiring the involvement of experts from various disciplines. It does appear that the litigation would increase in future as the authorities would seek to close enquiries before July 2019, while business would insist that their viewpoint is considered by the authorities. The high courts would see more action on the anti-profiteering front in the coming days.

M.S. Mani is partner at Deloitte India. The views expressed are personal.