Damning verdict on GST’s anti-profiteering rulings

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October 23, 2019 1:49 AM

Bombay High Court points to lack of appeals process in GST anti-profiteering law; also says it dents the reputation of a firm.

In the Jubilant Foodworks case, for instance, the Delhi High Court stayed the NAA order against the company on the grounds there was a “prima facie” case of a lack of methodology to determine profiteering.

While the government came up with the idea of anti-profiteering in the GST law to ensure consumers didn’t get shortchanged with manufacturers not passing on GST rate-cuts, it was never clear why the government didn’t trust the markets to ensure this happened. After all, the market for most goods and services is hyper-competitive, and no manufacturer or service provider would be so imprudent as to charge a higher price and risk losing business to the competition. Indeed, at a time when most are trying to retain customers—or attract new ones—by shaving off a few rupees from their product, it is difficult to imagine they wouldn’t use a GST rate cut to further lower prices to gain customers.

Indeed, the first set of anti-profiteering orders from the National Anti-Profiteering Authority (NAA) makes it clear the doubts were not misplaced. In the 80 or so orders passed by NAA so far, the profiteering amount collectively detected is a total of `600 crore; given this is a tiny fraction—0.00023%—of GST revenues collected till August, it is clear the NAA is more of a harassment than anything else. And, since profiteering is a nebulous concept, not surprisingly, most of the orders passed so far have been stayed by various courts. The commentary from the courts staying the cases has primarily questioned the constitutionality of the anti-profiteering piece of the GST legislation. The courts also seem to be pointing out that there is a lack of a set of rules or methodology that can help determine what “profiteering” constitutes, and how the amount is to be calculated. In the Jubilant Foodworks case, for instance, the Delhi High Court stayed the NAA order against the company on the grounds there was a “prima facie” case of a lack of methodology to determine profiteering.

In the most recent order in the case of Hardcastle Restaurants (McDonald’s), the Bombay High Court has been even harsher in observing “the Act and Rules provide no appeal,” and saying “the Authority can impose a penalty and can cancel the registration. The term profiteering, under the Act and Rules, is used in a pejorative sense (that) can severely dent the business reputation”. In the event, the court remanded the case back to NAA while saying “the Authority is newly established,” and “as a guidance to this Authority, highlighting the importance of fair decision-making is necessary”.

The Bombay High Court agreed with McDonald’s contention that it was against the principles of natural justice that, while the order was signed by four members, only three had been present at the hearings. In this instance, the NAA concluded that Hardcastle Restaurants had raised the base prices of most products sold even though the GST rate had been lowered from 18% to 5% with effect from November, 2017; a profiteering of Rs 7.49 crore was supposed to have taken place.

The company, for its part, argued that the base prices had been raised because the price of raw materials had gone up, and argued the drop in the tax rates had been neutralised by the withdrawal of the input tax credit (ITC); like others accused of profiteering, Hardcastle, too, argued that there was no methodology to determine anti-profiteering. If the GST Council is still not convinced about the need to remove the anti-profiteering law from the statute, it needs to come up with clear rules on how a company is to calculate the exact amount it has profiteered, more so in the case of firms that have thousands of stock keeping units (SKUs) and several times as many inputs that go into their manufacture/delivery.

The fact that the price of each input rises and falls independently at any point in time makes simplistic calculations like profiteering impossible. Besides, is reducing the losses on loss-leaders—most firms have such items to draw customers—the same as profiteering or it is a simple business decision?

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