Why GST's anti-profiteering law is pinching businesses?
The Delhi High Court on Tuesday admitted a writ petition challenging the constitutional validity of anti-profiteering law under the Goods and Services Tax (GST). Filing the petition, the petitioner argued that in absence of a mechanism to determine the quantum of profiteering, vagueness and arbitrariness come in the anti-profiteering orders. Abhishek Rastogi, partner, Khaitan & Co, who filed the petition on behalf of Pyramid Infratech against an order of the National Anti-profiteering Authority (NAA), says that Section 171 of Central GST which deals with anti-profiteering talks only about two factors (to determine profiteering) -- input and output taxes. "Our point is these two are relevant factors but they are not the only factors," he says. The anti-profiteering provisions, as expected, have opened a can of worms with some of the verdicts of the National Anti-profiteering Authority (NAA) raising concerns among businesses. In its earlier days, NAA was mostly rejecting complaints of profiteering and the way things were moving it looked like it was just a formality with the authority unlikely to wield much power. However, some of the verdicts in the last couple of months have unsettled businesses as the NAA started passing orders against them. In the case of Sharma Trading company, a wholesaler and stockist, a complaint was filed by a departmental store alleging that the former had not passed on the benefit of reduction in the rate of tax by lowering the price of Vaseline VTM 400 ML, when GST was reduced from 28 per cent to 18 per cent. The NAA upheld the complaint against Sharma Trading company despite the latter pleading that after reduction in the GST, the purchase price (excluding GST) on the stocks was increased by Hindustan Unilever (HUL), the manufacturer of the said good, in its software. "The differential amount has been recovered by HUL. Therefore profit, if any, was made by the HUL and not by it, which is merely an intermediary in the supply chain and had not made any profit due to reduction in the rate of tax," said the Sharma Trading company. Even HUL on record agreed that the differential amount recovered from the company had already been deposited by the HUL in the Consumer Welfare Fund (CWF). Commenting on the case, Rajat Mohan, managing partner of chartered accountant firm AMRG & Associates, said that the verdict had significantly increased the tax risk for all stockists, dealers, and distributors. "Since July, 2017 GST rate changes are being notified overnight, and tax authorities expect that pan-India dealers, stockists, shopkeepers would ascertain the anti-profiteering element due to this reduction of taxes and thereafter implement them in real-time," says Rajat. After this case, there were a slew of other verdicts which went in favour of the complainants. In the Pyramid Infratech case, where the authority held the company guilty of not passing on benefits of input tax credit to customers, and ordered return of Rs 8 crore benefits made by the real estate company to 2,476 flats owners. Similarly, in the Maybelline FIT Me Foundation case, the dealer of the product (Lifestyle Stores) were charged for not passing on the benefit of ITC. In another case, a retailer of Maggi Noodles alleged that despite reduction in GST rate from 18 per cent to 12 per cent, the dealer had not reduced the price on the Rs 5-pack of the noodle. The dealer argued that the benefit that it had accrued on Rs 5-pack has been passed on the customers by reducing the price of other pack of Rs 12-pack. However, NAA maintained that the dealer cannot arbitrarily decide the product pack on which it should reduce the price. It ordered the dealer to pay back Rs 90,778 along with interest in the Consumer Welfare Fund after refunding the profiteered amount of Rs 2,253 to the complainant. Commenting on this order, Pratik Jain, partner & leader, Indirect Tax, PwC India, says the ruling of NAA that pricing has to be done for each Stock Keeping Unit (SKU) is likely to lead to issues for certain industry segments specifically FMCG which deals with number of SKUs. "From a commercial standpoint, reducing price of each SKU particularly with smaller MRP (Rs. 5 or below) is often a challenge due to various reasons including availability of legal tender below Re. 1," he says. Now with the Delhi High Court admitting the writ petition questioning its constitutional validity of anti-profiteering provision, it would be interesting to see what verdict the HC comes up with. Till then, the businesses seem to be on their toes.