Anti Profiteering under GST – Here’s what companies should know

Last Updated at: October 23, 2019
486
Anti Profiteering Under GST – Here’s What Companies Should Know

The Goods and Services Tax Network in 2016 embodies a concept known as Anti-profiteering. The government has also recently extended the term of the National Anti-Profiteering Authority (NAA) by two years, till November 2021. The Authority has passed orders involving an aggregate of more than 600 crores in two years of its existence and has a backlog of several hundred cases, making anti-profiteering a significant issue.

In this article, we highlight the importance of anti-profiteering rules and break down the reasons why companies ought to be vigilant about not flouting the anti-profiteering rules in the first place.

Anti-profiteering – International Origins and its Necessity

As the name suggests, anti-profiteering guidelines are put in place, especially while framing tax laws that are likely to have a negative effect on prices. Anti-profiteering guidelines ensure that despite the lowering of taxes, which should be in effect, the company should lower the price point for that commodity, no company continued to charge the same or a higher price. These rules prevent a company from making an excessive profit, because of tax cuts, which are primarily meant to lower the cost borne by ultimate consumers.

The concept finds its origin in countries that introduced GST to lower aggregate prices and yet found inflation levels rising, such as the crisis faced by Singapore in 1994 when it switched over to the GST regime. Thus, equipped with the knowledge of this effect experienced by other countries, India chose to notify anti-profiteering guidelines alongside the initial rules for GST.

Legal Provisions on Anti-Profiteering

Section 171 of the Central Goods and Service Tax Act, 2017 mentions that any reduction in the tax rate on any supply of goods or services or any benefit of the input tax credit will have to be passed on to the recipient, that is the consumer by the registered person, that is the seller.

For example, Samsung was served with an anti-profiteering notice for not reducing prices on its 32 inch TV screen, when the rate had reduced from 28% to 18%.

Order under Anti-Profiteering Rules

An order may be passed once the proceedings and scrutiny are completed and report is obtained by the Director-General, Supplies. It may involve a compulsory reduction in prices, return of the amount charged in excess including an interest component to the recipient, payment of a penalty or even cancellation of GST registration.

Get Online GST Registration

What happens if there is a simultaneous increase in input costs with a reduction in tax rates?

The government’s basic objective behind introducing the goods and service tax was to subsume several indirect taxes, which had a cascading effect as they kept adding on to one another, inflating the final price ultimately paid by the customer. With increases in several inputs of manufacturing, distribution or sales that have variable prices such as petrol and diesel (which are both outside the purview of GST and on which the budget 2019 has increased excise duty), electricity prices, withdrawal of tax exemptions etc, the cost price of the commodity is bound to increase.

In such a scenario, even if there were to be a revision in the tax rate (say 5% from 12%), the final retail price of the commodity may not change significantly. Such matters become a contentious tax battle between the department and the business assessee. To serve proper records showing an exact break-up of costs, margins, revenue and other details assume great significance. A cost audit which primarily traces a cost trial, measuring the company’s policies against prescribed cost standards and authenticating the costs before and after GST implementation can be very helpful.

Moreover, sometimes goods may have been passed on to distributors making it difficult for the company to change price markups. Thus, it becomes important to retain records of all communication about price changes with dealers, associates and related suppliers.

Further, there is no statutorily prescribed mechanism of appeal to any court or tribunal against orders passed by the National Anti-Profiteering Authority, making writ petition to High Court the only option. In such a context, it is important to keep the anti-profiteering guidelines in mind while deciding or amending a cost structure, keeping exact records of price trails, written communications and audit details.

Anti Profiteering under GST – Here’s what companies should know

486

The Goods and Services Tax Network in 2016 embodies a concept known as Anti-profiteering. The government has also recently extended the term of the National Anti-Profiteering Authority (NAA) by two years, till November 2021. The Authority has passed orders involving an aggregate of more than 600 crores in two years of its existence and has a backlog of several hundred cases, making anti-profiteering a significant issue.

In this article, we highlight the importance of anti-profiteering rules and break down the reasons why companies ought to be vigilant about not flouting the anti-profiteering rules in the first place.

Anti-profiteering – International Origins and its Necessity

As the name suggests, anti-profiteering guidelines are put in place, especially while framing tax laws that are likely to have a negative effect on prices. Anti-profiteering guidelines ensure that despite the lowering of taxes, which should be in effect, the company should lower the price point for that commodity, no company continued to charge the same or a higher price. These rules prevent a company from making an excessive profit, because of tax cuts, which are primarily meant to lower the cost borne by ultimate consumers.

The concept finds its origin in countries that introduced GST to lower aggregate prices and yet found inflation levels rising, such as the crisis faced by Singapore in 1994 when it switched over to the GST regime. Thus, equipped with the knowledge of this effect experienced by other countries, India chose to notify anti-profiteering guidelines alongside the initial rules for GST.

Legal Provisions on Anti-Profiteering

Section 171 of the Central Goods and Service Tax Act, 2017 mentions that any reduction in the tax rate on any supply of goods or services or any benefit of the input tax credit will have to be passed on to the recipient, that is the consumer by the registered person, that is the seller.

For example, Samsung was served with an anti-profiteering notice for not reducing prices on its 32 inch TV screen, when the rate had reduced from 28% to 18%.

Order under Anti-Profiteering Rules

An order may be passed once the proceedings and scrutiny are completed and report is obtained by the Director-General, Supplies. It may involve a compulsory reduction in prices, return of the amount charged in excess including an interest component to the recipient, payment of a penalty or even cancellation of GST registration.

Get Online GST Registration

What happens if there is a simultaneous increase in input costs with a reduction in tax rates?

The government’s basic objective behind introducing the goods and service tax was to subsume several indirect taxes, which had a cascading effect as they kept adding on to one another, inflating the final price ultimately paid by the customer. With increases in several inputs of manufacturing, distribution or sales that have variable prices such as petrol and diesel (which are both outside the purview of GST and on which the budget 2019 has increased excise duty), electricity prices, withdrawal of tax exemptions etc, the cost price of the commodity is bound to increase.

In such a scenario, even if there were to be a revision in the tax rate (say 5% from 12%), the final retail price of the commodity may not change significantly. Such matters become a contentious tax battle between the department and the business assessee. To serve proper records showing an exact break-up of costs, margins, revenue and other details assume great significance. A cost audit which primarily traces a cost trial, measuring the company’s policies against prescribed cost standards and authenticating the costs before and after GST implementation can be very helpful.

Moreover, sometimes goods may have been passed on to distributors making it difficult for the company to change price markups. Thus, it becomes important to retain records of all communication about price changes with dealers, associates and related suppliers.

Further, there is no statutorily prescribed mechanism of appeal to any court or tribunal against orders passed by the National Anti-Profiteering Authority, making writ petition to High Court the only option. In such a context, it is important to keep the anti-profiteering guidelines in mind while deciding or amending a cost structure, keeping exact records of price trails, written communications and audit details.

FAQs

No FAQs found

Add a Question


No Record Found
SHARE
Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.