GST Anti-Profiteering: A double-edged sword
- Opinion
- August 29, 2022
The concept of anti-profiteering was introduced under the GST law to ensure that any reduction in the tax incidence is passed on the customer and not retained by the supplier. While the intent behind the provision has been unambiguous, the implementation of the anti-profiteering provisions has proved to be a double-edged sword for businesses.
The central government constituted National Anti-profiteering Authority (NAPA) to ensure that the commensurate benefit of allowance of input tax credit or reduction of tax is passed on to the customer.
The orders of NAPA, thus far, have indicated that the benefits can only be passed through reduction in price of the product. Further, certain benefits passed as a result of marketing strategies may be over-looked by NAPA.
There is a worrying level of uncertainty in the industry as to how to increase the base price of a product or service in situations of genuine reasons such as increased cost of inputs, higher losses, market conditions, etc. The industry is wondering whether they are required to approach the NAPA permitting them to increase the price specially in situations where the GST rate was reduced? Would NAPA, in such a situation, be acting as a body issuing price control orders to monitor profiteering and regulate the prices of goods and services?
As per the CGST Rules, NAPA has the power to determine the methodology and procedure as to whether the benefits of reduced tax incidence are passed on the customer. However, the guidelines or methodology to compute the benefits have still not been announced. In absence of such guidelines, the implementation of anti-profiteering provision is plagued with ambiguities. In countries such as Malaysia and Australia, the guidelines for calculation of the benefit were made available for industry to plan their GST implementation. Without the similar implementation strategy, there is no uniformity in the manner the benefits are being passed on across businesses.
On analyzing the orders pronounced by NAPA, certain businesses realized that the methodology adopted by them for calculation of benefits will not be acceptable to NAPA. It is also not clear how the courts will deal with these orders. Thus, it is prudent for companies to analyse the impact of anti-profiteering in light of the orders pronounced by NAPA.
The calculation of per-unit tax incidence can still be assessed by industries dealing with goods. A bigger challenge is faced by the service industry where in most cases, the services are tailor made for the customer and it is significantly difficult for service industry to compute the per-unit tax incidence for the service provided.
The provisions of anti-profiteering allow any individual to approach the standing/ screening committee with documentary evidence that a certain company has resorted to profiteering. The standing committee/ screening committee have received multiple complaints against the real estate, FMCG and auto companies from the individuals and NAPA took cognizance of the complaints and accordingly passed orders. However, this does not stop NAPA from taking cognizance of industries where the complaints have not been received yet. The complaints received from the individuals would mostly be with respect to companies making supplies to consumers, therefore, in most cases the companies making supplies to businesses have largely remained unaffected. The companies who have not been subject to any investigation should remain prepared for any such event with the calculations as to how they have passed on the benefit (if any).
However, anti-profiteering provisions have not had only negative impact. Certain businesses have been positively affected by the provisions opening doors for introspection and the way forward.
The burden of complying with the anti-profiteering provision has provided an opportunity to businesses to analyse the per-unit tax burden for the goods and services supplied. This has resulted in better understanding of the cost structure and allowing businesses to take actions wherever required.
The provisions under the GST law have also presented an opportunity to businesses to understand the supply chain in order to understand the tax incidence. Prior to introduction of GST, certain companies had taken steps to understand the tax structure on procurements made by them and their vendors. This opened up communication between the businesses in the supply chain to understand the taxing provisions and rates both prior and subsequent to introduction of GST. Further, people carrying out this exercise were made aware about the applicable rate of taxes on the inputs procured by the vendors allowing them to keep a check and remain updated with the changing tax rate and input tax credit eligibility.
The in-depth understanding of the supply chain has enabled the companies to indulge in healthy negotiations with the vendors and customers. Further, the study to comply with anti-profiteering provisions has allowed certain companies to have a better understanding of their competition and other market forces driving the price of their commodities. The information and data collected as a result of this exercise not only allows companies to be in a better position at the time of investigations, it has also enabled companies to understand their business in a more comprehensive manner.
In conclusion, the impact of anti-profiteering provision has the potential to be far-reaching and cannot be undermined in any manner. As per the GST provisions, NAPA shall cease to exist after the expiry of two years from the date the chairman enters his office. However, considering the ever-changing rates and intention of the government to pass on the benefits to the consumers, the tenure of NAPA is likely to be continued.
Lastly, in certain situations, businesses have successfully represented for reduction of GST rate for their product or service. The companies approaching the Council must consider the impact of anti-profiteering provision when representing to the Council as the benefits arising as a result of reduction of taxes are eventually required to be passed on to the customers.
About the authors:
L Badri Narayanan
is Partner at Lakshmikumaran
& Sridharan Attorneys.
Shweta Walecha
is Joint Director at Lakshmikumaran
& Sridharan Attorneys.
The central government constituted National Anti-profiteering Authority (NAPA) to ensure that the commensurate benefit of allowance of input tax credit or reduction of tax is passed on to the customer.
The orders of NAPA, thus far, have indicated that the benefits can only be passed through reduction in price of the product. Further, certain benefits passed as a result of marketing strategies may be over-looked by NAPA.
There is a worrying level of uncertainty in the industry as to how to increase the base price of a product or service in situations of genuine reasons such as increased cost of inputs, higher losses, market conditions, etc. The industry is wondering whether they are required to approach the NAPA permitting them to increase the price specially in situations where the GST rate was reduced? Would NAPA, in such a situation, be acting as a body issuing price control orders to monitor profiteering and regulate the prices of goods and services?
As per the CGST Rules, NAPA has the power to determine the methodology and procedure as to whether the benefits of reduced tax incidence are passed on the customer. However, the guidelines or methodology to compute the benefits have still not been announced. In absence of such guidelines, the implementation of anti-profiteering provision is plagued with ambiguities. In countries such as Malaysia and Australia, the guidelines for calculation of the benefit were made available for industry to plan their GST implementation. Without the similar implementation strategy, there is no uniformity in the manner the benefits are being passed on across businesses.
On analyzing the orders pronounced by NAPA, certain businesses realized that the methodology adopted by them for calculation of benefits will not be acceptable to NAPA. It is also not clear how the courts will deal with these orders. Thus, it is prudent for companies to analyse the impact of anti-profiteering in light of the orders pronounced by NAPA.
The calculation of per-unit tax incidence can still be assessed by industries dealing with goods. A bigger challenge is faced by the service industry where in most cases, the services are tailor made for the customer and it is significantly difficult for service industry to compute the per-unit tax incidence for the service provided.
The provisions of anti-profiteering allow any individual to approach the standing/ screening committee with documentary evidence that a certain company has resorted to profiteering. The standing committee/ screening committee have received multiple complaints against the real estate, FMCG and auto companies from the individuals and NAPA took cognizance of the complaints and accordingly passed orders. However, this does not stop NAPA from taking cognizance of industries where the complaints have not been received yet. The complaints received from the individuals would mostly be with respect to companies making supplies to consumers, therefore, in most cases the companies making supplies to businesses have largely remained unaffected. The companies who have not been subject to any investigation should remain prepared for any such event with the calculations as to how they have passed on the benefit (if any).
However, anti-profiteering provisions have not had only negative impact. Certain businesses have been positively affected by the provisions opening doors for introspection and the way forward.
The burden of complying with the anti-profiteering provision has provided an opportunity to businesses to analyse the per-unit tax burden for the goods and services supplied. This has resulted in better understanding of the cost structure and allowing businesses to take actions wherever required.
The provisions under the GST law have also presented an opportunity to businesses to understand the supply chain in order to understand the tax incidence. Prior to introduction of GST, certain companies had taken steps to understand the tax structure on procurements made by them and their vendors. This opened up communication between the businesses in the supply chain to understand the taxing provisions and rates both prior and subsequent to introduction of GST. Further, people carrying out this exercise were made aware about the applicable rate of taxes on the inputs procured by the vendors allowing them to keep a check and remain updated with the changing tax rate and input tax credit eligibility.
The in-depth understanding of the supply chain has enabled the companies to indulge in healthy negotiations with the vendors and customers. Further, the study to comply with anti-profiteering provisions has allowed certain companies to have a better understanding of their competition and other market forces driving the price of their commodities. The information and data collected as a result of this exercise not only allows companies to be in a better position at the time of investigations, it has also enabled companies to understand their business in a more comprehensive manner.
In conclusion, the impact of anti-profiteering provision has the potential to be far-reaching and cannot be undermined in any manner. As per the GST provisions, NAPA shall cease to exist after the expiry of two years from the date the chairman enters his office. However, considering the ever-changing rates and intention of the government to pass on the benefits to the consumers, the tenure of NAPA is likely to be continued.
Lastly, in certain situations, businesses have successfully represented for reduction of GST rate for their product or service. The companies approaching the Council must consider the impact of anti-profiteering provision when representing to the Council as the benefits arising as a result of reduction of taxes are eventually required to be passed on to the customers.
About the authors:
L Badri Narayanan
is Partner at Lakshmikumaran
& Sridharan Attorneys.
Shweta Walecha
is Joint Director at Lakshmikumaran
& Sridharan Attorneys.