The concept of ‘anti-profiteering’ and specifically the obligation on the part of the business to pass on benefits arising either from a reduction in GST rates, and, or through enhanced input credits has been widely socialized with both business and consumers.
The issue of ‘anti-profiteering’ has gained momentum over the last nine months. During this period the National Anti-Profiteering Authority (NAA) has been formally set up along with the overall machinery of investigation through the Director General of Anti-Profiteering (DGAP) and the complaints mechanism via the screening and standing committees.
At the same time, the concept of ‘anti-profiteering’ and specifically the obligation on the part of the business to pass on benefits arising either from a reduction in GST rates, and, or through enhanced input credits has been widely socialized with both business and consumers.
With consumers at the heart of the provisions, the NAA has not only executed a nationwide campaign raising awareness of the issue but has also simplified the complaint process to encourage consumers to report possible breaches. This has resulted in a large number of complaints being filed alleging profiteering and a majority are still to be investigated.
It is, however, businesses that have the core responsibility to compute and pass on the GST benefit in the prices set for both goods and services. This has been particularly difficult to implement in the absence of a detailed framework or prescribed methodology from the NAA.
As has been previously noted, this is a clear departure from the approach adopted in other Countries and has resulted in repeated requests for guidance and a formal methodology to be issued.
Whilst the NAA has engaged in dialogue with both individual business and industry groups to understand issues arising, there have been several statements from the NAA confirming that complexity of business models means it is not possible to issue standard guidance. In the absence of guidance, business may rely on the rationale and principles emerging from the NAA Orders to assess compliance with the provisions.
These orders together with recent communications begin to shed light on the fundamentals that business should consider in their conduct. These include:
- An understanding of the complaint and investigation process, including the details required to be furnished by business
- Confirmation that the obligation to pass on benefits applies throughout the supply chain, whether it is a manufacturer setting the MRP, a dealer, retailer or even a marketplace operator, no business is absolved of the obligation
- The benefit must be passed on immediately. If customers cannot be identified, sums should be deposited in the Consumer Welfare Fund
- The benefit should be passed on by way of a reduction in price; There is no materiality level and business is required to pass on the benefit across all products and services
- Compliance seems to be required at an SKU level and complexity is not a defense
- Other factors impacting pricing decisions such as increase in commodity costs and impact of discounts should be documented and articulated to demonstrate that notwithstanding these factors, the GST benefit has nevertheless been passed on. The NAA has re-iterated that the rules are not “anti-profit” and that as an organization the NAA is not a price fixing authority
- Failure to meet the obligations will lead to refund of the sum to the consumer wherever identifiable, imposition of penalties and a requirement to deposit the sum in the Consumer Welfare Fund together with interest
- The NAA may extend its review to other goods/services in the event of profiteering being established
- The process should be driven by facts as evidenced by numbers rather than legal argument.
With NAA orders coming in quick succession, it is evident that the government is seriously considering compliance regarding the anti-profiteering requirements. However more guidance from the NAA, would be welcome to support business in satisfying the requirements with some degree of certainty. There, however, remain a number of unresolved issues, such as:
- The obligations of the ‘brand owner’ regarding the goods in the supply chain that are no longer in its control
- Whether the benefit can be passed on in any manner other than price reduction
- How to capture the value of stock in the supply chain following rate changes,
- The treatment to be applied to loss-making products
- The period of investigation.
Given the wide powers of the NAA to investigate and impose penalties for non-compliance, which includes cancellation of supplier’s GST registration and the lack of a definitive framework, the authority is now facing its first legal challenge regarding the constitutional validity of the anti-profiteering mechanism.
With the potential future rationalization of rates and expansion of regime to petroleum and other items currently outside the scope of GST, the compliance on anti-profiteering will continue for some time. Although the initial mandate of NAA is for a period of 2 years from the date of implementation of GST, an extension of the term may be considered. For now, anti-profiteering is here to stay.
Given the rapid pronunciation of orders by the NAA in the last few months, it is now even more critical for businesses to undertake an anti-profiteering review to assess their compliance with the requirements of this law. As this should be strictly a fact-driven process, a pro-active approach is desirable.
Authored by Bela Sheth Mao, Partner, and Parul Anand and Tarun Jain, Directors, Deloitte India. Views are the authors’ own.