GST and Taxation for MSMEs: The conspicuous omission of a uniform and binding framework to determine profiteering in spite of an enabling provision under Rule 126 of the CGST Rules is unjust and unfair on SMEs.
- By Abhishek A Rastogi and Pratyushprava Saha
GST and Taxation for MSMEs: Taking cues from global encounters post-implementation of VAT/GST, the Indian Government was anxious about the possible inflationary tenors of GST. Inflation retorted sharply in most countries following the implementation of a new tax regime. The GST Council thought it prudent to include enabling provisions on anti-profiteering and incorporated the seeds of anti-profiteering law in the basic construct of the GST while legislating the Act itself. However, recent anti-profiteering investigations in few cases expose certain gaps in the existing legal framework surrounding the anti-profiteering law.
Impact of Anti-Profiteering Investigation on SMEs
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The impact of additional liability on SMEs on account of anti-profiteering investigation is quite onerous. Many small and medium real estate players are suffering the wrath of anti-profiteering investigations resulting in disputable liabilities running up to crores, which can be initiated from even a single complaint from a homebuyer. Cases such as Mhd. Azid Ramzani & DGAP vs Adarsh Marbles indicate that even small ancillary businesses connected to the real estate sector, such as suppliers of vitrified tiles are also under scanner.
Section 171 of the CGST Act empowers the government to constitute the National Anti-profiteering Authority (NAA) to examine the implementation of antiprofiteering provisions.
While the NAA has notified a “Methodology and Procedure” there is a conspicuous lack of established uniform mechanism leading to divergent views and computations on profiteering. There is a possibility that the NAA may adapt a completely different methodology for determination of profiteering than that applied by the assessee leading to two completely divergent numbers for anti-profiteering. This was argued in the first landmark decision in such a matter, in the case of Pyramid Infratech, in a writ petition argued by us before the Hon’ble Delhi High Court.
Since there is no standard mechanism available, it is not possible for an entity to verify as to whether it is passing the benefit to consumers as per the required standards. A lot of arbitrariness and uncertainty has crept into anti-profiteering investigations due to the lack of appropriate guidelines. The irony of the situation is that an entity can be brought under the radar of non-compliance with anti-profiteering provisions in spite of passing the benefits based on its own assessment of increased credits and reduced prices.
Where a taxing provision imposes an obligation without prescribing the way it is to be fulfilled, such provision does not fulfil the test of the due process laid down under Article 14 of the Constitution of India. In the absence of methodology for determination of profiteering, any investigation conducted and any subsequent order passed by the NAA becomes susceptible to challenges on the grounds of violation of fundamental rights conferred under the Constitution of India. The Hon’ble Delhi High Court issued orders staying proceedings of the NAA in a case argued by us on behalf of Sattva Group.
What GST Council should Consider
Further, Section 171 merely calls upon the NAA to examine whether benefits arising out of the reduction in tax rates and increased input tax credit have been passed on to the end consumers through the commensurate reduction in prices. The provision does not mandate the NAA to consider various extraneous factors that may affect the price. The conspicuous omission of a uniform and binding framework to determine profiteering in spite of an enabling provision under Rule 126 of the CGST Rules is unjust and unfair on SMEs, especially where violations are subjected to a hefty penalty. The GST Council should consider setting up a threshold for adjudicating anti-profiteering matters whereby SMEs can be safeguarded against unwarranted legal and representational costs in defending frivolous complaints.
While antiprofiteering instances are being dealt with leniently, giving enough room for reasonable doubt in favour of the entities, a standard yardstick for determining ‘profiteering’ would do a lot of good to businesses under GST. On the contrary, lack of adequate guidelines may give room to misinterpretations and difference in computations thus inviting challenges and disputes. To truly accomplish the objects of anti-profiteering provisions, a uniform mechanism to compute the quantum of “profiteering” after due consideration of concerns raised by industry is a pressing need of the hour.
(Abhishek A Rastogi is the Partner and Pratyushprava Saha is the Senior Associate at of Khaitan & Co. Views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co.)