The historic Goods and Service Tax (GST) brought significant changes to India’s indirect tax system. Unlike other countries, the GST in India has a multi-tier tax structure. Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit should have been passed on to the recipient by way of commensurate reduction in prices. However it has been the experience of many countries that when GST was introduced there has been a marked increase in inflation and the prices of the commodities. This happened in spite of the availability of the tax credit right from the production stage to the final consumption stage which should have actually reduced the final prices. This was obviously happening because the supplier was not passing on the benefit to the consumer and thereby indulging in illegal profiteering.

Further the Study Report released by the Comptroller & Auditor General (C&AG) of India in June, 2010[1] mentioned about several cases of profiteering wherein dealers were not passing on the benefit of tax rate reduction to the consumers in the wake of implementation of VAT in the country. The above C&AG report, after checking the records of 13 manufacturers in a State in three initial months of implementation of VAT found that the manufacturers did not reduce the MRP of the goods despite sharp fall in the tax rate post-VAT implementation.

As a learning from the VAT experience, a legal teeth was provided under the GST law to incorporate anti-profiteering provisions to check profiteering by businesses when GST was being rolled out in the country. GST Law provided for constitution of National Anti-profiteering Authority to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him to ensure that the consumer is protected from arbitrary price increase in the name of GST.

What is profiteering?

Section 171 of the Central Goods and Service Tax Act, 2017 provides for Anti Profiteering measure. As per the Section, “any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.” Law provides mandatory for every tax payer to pass on the benefits arising out of following to the recipient of the goods or services or goods and services, further reduction of rate of tax on any supply of goods or services and benefit of input tax credit.

Methodology to determine profiteering

The anti profiteering provisions are sector-agnostic and have come to be widely used in the past year, with complaints filed against restaurants, coffee-shops, car dealerships, FMCG companies, fashion retail outlets, etc.

Institutional framework

To ensure that the benefits of the reduction of GST rates and various benefits arising out GST implementation are passed on to the ultimate consumer by way of reduction in price, the GST law provides for the following institutional framework as tabulated below:

Authority	Constitution
State Level Screening Committee	1 officer of the State and Central governments, nominated by the Commissioner Chief Commissioner respectively
Standing Committee	Officers of the State & Central Government, as nominated by the GST Council nominated by the Commissioner and Chief Commissioner respectively
Directorate General of Anti profiteering	Investigative arm of National Anti-Profiteering Authority (NAA)
National Anti-Profiteering Authority	Constituted under Rule 122 of Central Goods and Services Tax Rules, 2017 (“CGST Rules, 2017”);consists of a Chairman and 4 Technical Members

Scrutiny of Applications

All applications from interested parties on issues of local nature shall first be examined by the State level Screening Committee constituted in each State. The Screening Committee on being satisfied that the supplier has not passed on the reduction in rate of tax on any supply of goods or services or the benefit of input tax credit on to the recipient by way of commensurate reduction in prices, will forward the application with its recommendations to the Standing Committee on Anti-profiteering. If the Standing Committee is satisfied that there is a prima-facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, it shall refer the matter to the Director General of Safeguards for a detailed investigation.

Investigation

The Director General of Safeguards shall conduct investigation and collect evidence necessary to determine undue profiteering and before initiation of the investigation, issue a notice to the interested parties (and to such other persons as deemed fit for a fair enquiry into the matter) containing, inter alia, information on the following, namely:

(a) the description of the goods or services in respect of which the proceedings have been initiated,

(b) summary of the statement of facts on which the allegations are based; and

(c) the time limit allowed to the interested parties and other persons who may have information related to the proceedings for furnishing their reply.

The evidence or information presented to the Director General of Safeguards by one interested party can be made available to the other interested parties, participating in the proceedings. The evidence provided will be kept confidential and the provisions of the Right to Information Act, 2005 (22 of 2005) [2]shall apply mutatis mutandis to the disclosure of any information which is provided on a confidential basis. Director General of Safeguards will also have same powers as that of a civil court and every such inquiry will be deemed to be a judicial proceeding. The investigation should be completed within a period of three months or within such extended period not exceeding a further period of three months for reasons to be recorded in writing as allowed by the Standing Committee and, upon completion of the investigation, furnish to the Authority, a report of its findings along with the relevant records.

Order
Where the Authority determines that a registered person has not passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order:-

i) reduction in prices;

ii) return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest;

iii) imposition of penalty as specified under the Act; and

iv) cancellation of registration under the Act.

Any order passed by the Authority shall be immediately complied with by the registered person failing which National Anti-Profiteering Authority shall initiate action to recover the amount in accordance with the provisions of the law.

Reason behind spurt in anti-profiteering litigation under GST

The GST Law doesn’t prescribe any methodology to determine the emergence of a benefit. As per the GST Law,[3] the NAA may determine the methodology and procedure for determination as to whether commensurate reduction in prices has been passed to the recipient. However, no parameters have been prescribed as yet.

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. Recently there is 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 which were subjected to the MRP regime also require 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. The rulings of the NAA till date to discern the parameters which have been considered while arriving at its conclusions. The majority of orders passed by the NAA are in favour of the assessee. To substantiate the same, few decisions of NAA in this regard is discussed below:

· In Dinesh Mohan Bhardwaj vs Vrandavanshwree Automotive Pvt. Ltd,[4] concerning a Honda car dealer, the NAA undertook a comparative analysis of the costs pre and post GST regime, keeping the profit margin constant in absolute terms, computed the benefit which ought to be passed to the customer, and since the reduction in sale price post-GST was higher than such benefit from GST, concluded that there was no profiteering.

· In Kumar Gandharv vs KRBL Limited,[5] concerning a seller of India Gate Basmati Rice, the NAA ascribed relevance to the fact that the input tax credit utilised was less than the output tax paid and that the price of a major raw material had increased by more than 30% in the year 2017 compared to 2016.

· In Rishi Gupta vs. Flipkart Internet Pvt. Ltd.,[6] the supplier, selling through the electronic platform (“e-platform”) had granted a discount at the time when the buyer had placed the order, but after a rate cut on 15.11.2017, had withdrawn the discount and charged the reduced GST rate on the base (undiscounted) price. The NAA held that since the supplier through the platform has refunded the excess GST collected, neither the Supplier nor the e-platform had indulged in profiteering. It had also noted that a withdrawal of discount by the supplier, post the rate change, did not amount to profiteering as the same was offered from his profit margin. The NAA has (vide letter dated 24.05.2018) also directed the Director General of Audit, Central Board of Indirect Taxes and Customs to audit the major e-platforms as regards cases where e-platforms had collected excess GST from the buyers and not refunded the same after the rate cut on 15.11.2017 and submit its findings to the NAA.

Since Section 171 came into force on 1 July 2017, with a two-year sunset clause, there was 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, made 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.

Conclusion
However, 35th GST Council Meeting chaired by Nirmala Sitharaman[7] extended the tenure of the anti profiteering body for a further period of two years to November 2021 with more stringent rules to ensure companies pass on the benefit of lower taxes to consumers. The GST Council also decided to impose more stringent penalties for companies engaged in profiteering. If the profiteered amount is not surrendered within 30 days, then the company will be penalised to the extent of 10 per cent of the same.

As per the latest procedure approved by the GST Council Meeting, officers can make a preliminary examination concerning profiteering post cut in any GST rate or an additional input tax credit taken by any company from its books. Further 20 suppliers including manufacturers, distributors or service providers are to be identified and B2B invoices in their value chain for any prima facie violations of anti profiteering provisions. The Officers are further authorised to make mock purchases to gather invoices as evidence, check fixation of stickers with revised MRP and visit any premise in case of probable profiteering after approval from competent authority. The Authorities will be monitoring sudden swelling up of input tax credits for quarters immediately succeeding any GST rate reduction or changes in structure of inputs or abrupt increase in net profits, any enhancement of base price or any product to deny reduction in tax rate to consumers. Further the input tax credit ledger will be scrutinised to check profiteering from tax rate reduction or input tax credit changes.

In view of the new norms, it can be expected that profiteering should not be raised in a routine manner. However imposition of higher penalty for profiteering is a tough measure, considering the absence of detailed guidelines on price behaviour.

End-Notes
[1] Implementation of Value Added Tax (VAT) in India-Lessons for transition to GST.
[2] Section 11 of the Right to Information Act, 2005.
[3] Rule 126 of the CGST Rules, 2017
[4] Order dated 27.03.2018
[5] Order dated 04.05.2018
[6] Order dated 18.07.2018
[7] July 22, 2019