The recently concluded 28th meeting of GST Council has recommended changes in the GST rates on several goods and brought down the GST rates on number of products bringing as many as 88 products in lower tax slab. This is being seen as a major relief for the consumers and shall provide impetus to the relevant industries. However, lowering of tax rates always brings along with it the fear of profiteering by the Industry and the consumers for whom the taxes are brought down are deprived of these benefits.
Thus, it becomes imperative on the part of the concerned Industry to lower the rates of the goods accordingly and pass on the benefits of lower GST rates to the consumers from 27th July 2018 onwards from when the revised GST rates are going to be applicable. Non-compliance of the same shall attract huge penalties under Anti-Profiteering provisions.
This GST Charcha aims to bring to the fore the necessity of compliance of anti-profiteering provisions and the precautions that should be taken up by tax paying business entities in order to comply with the provisions of anti-profiteering and safeguard themselves from the penalty provisions.
Meaning of Anti-Profiteering and its implication:
Before proceeding with the compliances pertaining to passing on benefits to the consumers on account of lowering of GST rates, let us first discuss the meaning of anti-profiteering and what all does it entail.
Profiteering in essence means unfair, unjust and unreasonably high profits which are earned illegally. Anti-profiteering is a measure taken up by the government in order to prevent the taxpaying business entities from making unreasonable high profits at the cost of unreasonable loss to the consumers and see that the benefits arising due to lowering of tax rates and seamless flow of input credits are extended to the consumers.
Provisions of Anti-profiteering measures – Section 171 of the CGST Act, 2017:
In terms of Section 171(1) of the CGST Act, 2017, “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.”
Apparently, this Section casts responsibility to pass on benefit of GST by supplier to recipient for following two aspects:
(a) Benefit on account of reduction in effective rate of tax: The benefit of reduced tax rate should be passed on to the consumer in the form of reduced price. For example: The rate of tax on specified goods has reduced to 18% from 28%. This means the supplier of such goods should technically sell said goods having basic price of Rs. 100, for Rs. 118 and not on Rs. 128.
(b) Benefit of increased availability of input tax credit: Input tax credit is made available to the supplier of goods or services, which was otherwise not available earlier, is termed as benefit in the hands of supplier, that must be passed on to the consumer in the form of reduced prices of goods or services.
Therefore, it is the responsibility of the supplier of goods or services to ensure that incremental 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.
Industries to be benefitted by reduction in GST Rates:
Industries dealing in following goods are going to be benefitted by reduction in the GST rates:
A. 28% to 18%
- Paints and varnishes (including enamels and lacquers)
- Glaziers’ putty, grafting putty, resin cements
- Refrigerators, freezers and other refrigerating or freezing equipment including water cooler, milk coolers, refrigerating equipment for leather industry, ice cream freezer etc.
- Washing machines.
- Lithium-ion batteries.
- Vacuum cleaners.
- domestic electrical appliances such as food grinders and mixers & food or vegetable juice extractor, shaver, hair clippers etc.
- Storage water heaters and immersion heaters, hair dryers, hand dryers, electric smoothing irons etc
- Televisions upto the size of 68 cm
- Special purpose motor vehicles. e.g., crane lorries, fire fighting vehicle, concrete mixer lorries, spraying lorries
- Works trucks [self-propelled, not fitted with lifting or handling equipment] of the type used in factories, warehouses, dock areas or airports for short transport of goods.
- Trailers and semi-trailers.
- Miscellaneous articles such as scent sprays and similar toilet sprays, powder-puffs and pads for the application of cosmetics or toilet preparations.
B. 28% to 12%
- Fuel Cell Vehicle. Further, Compensation cess shall also be exempted on fuel cell vehicle.
C. 18%12%/5% to Nil:
- Stone/Marble/Wood Deities.
- Rakhi [other than that of precious or semi-precious material of chapter 71]
- Sanitary Napkins.
- Coir pith compost.
- Sal Leaves siali leaves and their products and Sabai Rope.
- Phool Bhari Jhadoo [Raw material for Jhadoo]
- Khali dona.
- Circulation and commemorative coins sold by Security Printing and Minting Corporation of India Ltd [SPMCIL] to Ministry of Finance.
- Chenille fabrics and other fabrics under heading 5801.
- Handloom dari.
- Phosphoric acid (fertilizer grade only).
- Knitted cap/topi having retail sale value not exceeding Rs 1000.
E. 18% to 12%:
- Bamboo flooring.
- Brass Kerosene Pressure Stove.
- Hand Operated Rubber Roller.
- Zip and Slide Fasteners.
F. 18% to 5%:
- Ethanol for sale to Oil Marketing Companies for blending with fuel.
- Solid bio fuel pellets.
G. Rate change made in respect of footwear
- 5% GST is being extended to footwear having a retail sale price up to Rs. 1000 per pair.
- Footwear having a retail sale price exceeding Rs. 1000 per pair will continue to attract 18%.
H. GST rates have been recommended to be brought down for specified handicraft items [as per the definition of handicraft, as approved by the GST council] from, -
18% to 12%:
- Handbags including pouches and purses; jewellery box.
- Wooden frames for painting, photographs, mirrors etc.
- Art ware of cork [including articles of sholapith].
- Stone art ware, stone inlay work.
- Ornamental framed mirrors.
- Glass statues [other than those of crystal].
- Glass art ware [ incl. pots, jars, votive, cask, cake cover, tulip bottle, vase ].
- Art ware of iron.
- Art ware of brass, copper/ copper alloys, electro plated with nickel/silver.
- Aluminium art ware.
- Handcrafted lamps (including panchloga lamp).
- Worked vegetable or mineral carving, articles thereof, articles of wax, of stearin, of natural gums or natural resins or of modelling pastes etc, (including articles of lac, shellac).
- Ganjifa card
12% to 5%:
- Handmade carpets and other handmade textile floor coverings (including namda/gabba).
- Handmade lace.
- Hand-woven tapestries.
- Hand-made braids and ornamental trimming in the piece.
I. Miscellaneous Change relating to valuation of a supply:
- IGST @5% on Pool Issue Price (PIP) of Urea imported on Govt. account for direct agriculture use, instead of assessable value plus custom duty.
- Exemption from Compensation cess to Coal rejects from washery [arising out of cess paid coal on which ITC has not been taken].
Now, the government would like to ensure that the benefits arising out of lowering of GST rates for above mentioned goods should reach the consumers, instead of the same being pocketed by the supplier of such goods.
Anti-Profiteering: A look back
The government has adopted anti-profiteering measures, which provide the policy and the legal framework to deal with any violation of anti-profiteering provision.
In recent past, we have seen that the Director General of Anti-Profiteering (DGA) has sent notices to various companies like Hardcastle Restaurants, which runs McDonald’s restaurants in west and south India, Lifestyle International, Honda Motor and Hindustan Unilever Ltd. (HUL) dealer alleging violation of anti-profiteering provisions for not reducing the prices of the commodities after the reduction of GST rates. The instance where HUL has been served notices by the DGA for profiteering from the lower tax rates and their benefits not reaching to the consumers appears significant.
To this notice, HUL has responded that it is willing to offer INR 119 crores for the benefits accrued due to lowering of tax rates and the benefit it did not extend to the consumers. The DGA has in turn asked HUL the basis on which they reached the conclusion that they had made the stated unreasonable profit. Though the matter is still pending but it throws some light on the precautious measures that a taxpayer must pay heed to avoid the hefty penalties, which may accrue due to the violation of anti-profiteering provisions.
Consequences of non- compliances of Anti-Profiteering measure:
If the DGA adjudicates that an entity has violated the anti-profiteering provisions, then, it may order to reduce the price of the commodity, return the excessive amount collected along with an interest of eighteen percent, or it may impose a hefty penalty or worst case it may lead to cancellation of the registration of the entity.
How to measure ‘commensurate reduction’:
It is very difficult to measure commensurate reduction in prices as the said term is not defined in GST Law or Rules made thereunder. Unfortunately, no further guidance has emerged from the Government on the connotation of ‘commensurate reduction’ and its applicability in various specific scenarios. The approach used in the Indian context to calculate the ‘Commensurate reduction in price’ provides for an upper and lower price limit of the scheduled commodities that cannot be sold beyond the fixed upper and lower limit. Such a methodology cannot be taken up in the anti-profiteering measures since it is impractical to calculate a large cross-section of commodities and services and then fixing their upper and lower limits.
Thus, determining whether commensurate reduction has been made or not is an uphill task itself in the absence of any clear-cut guidelines. Nonetheless, going by the general meaning of profiteering, suppliers of goods must not make any undue excessive profits out of GST rate cut.
Recent Legal Jurisprudence on Anti- Profiteering Measure:
1. Dinesh Mohan Bhardwaj Vs. Vrandavaneshwree Automotive (P.) Ltd. [(2018) 92 taxmann.com 360 (NAA)]
Facts: Applicant had entered into contract with respondent dealer prior to enactment of GST for purchase of a car, for which delivery was taken after implementation of GST. Applicant filed application alleging profiteering against respondent stating that post GST respondent was required to reduce taxes from 51% to 29% but same was not done.
Held: It was held that benefit of reduction in the tax rate was passed on to the applicant by way of reduction in the price of the car. Benefit of Rs. 10,550/- on account of reduction of tax by about 2% viz. from 31.254% (pre-GST) to 29% (post GST) has already been passed on to the applicant and the amount of Rs. 10,550/- is inclusive of the ITC. Therefore, no additional benefit on account of ITC is required to be paid by the respondent, authorised dealer of M/s Honda Car India Ltd. No case of profiteering made out and hence respondent was held as not contravening the provisions of Section 171 of the CGST Act, 2017. Application made under Rule 128 of CGST Rules, 2017 was dismissed.
2. Abel Space Solutions LLP Vs. Schindler India (P.) Ltd. [(2018) 94 taxmann.com 163 (NAA)]
Facts: Applicant had purchased lift from respondent and had filed application before Anti-profiteering Authority claiming that respondent had issued three invoices one of which was issued on 28-6-2017 on which then applicable Service Tax was charged but on two invoices issued on 27-7-2017 i.e. after coming into force of GST, tax had been charged without excluding erstwhile Excise Duty and, hence, he had been charged tax twice once on pre-GST Excise Duty and subsequently on full value of material used in lift.
Held: There is no substance in the claim made by applicant and, therefore, the Authority accepts the report filed by the Director General of Safeguard u/r 129(6) of the CGST Rules, 2017 and orders dropping of the present proceedings as no violation of the provisions of Section 171 have been established inasmuch as installation of lift had been completed after coming into force of CGST Act, 2017 and applicant was liable to be charged GST at rate which was prevalent on 27-7-2017.
3. Kumar Gandharv Vs. KRBL Ltd. [(2018) 93 taxmann.com 149 (NAA)]
Facts: The Applicant in this case filed an application that the benefit of reduction in rate of tax on ‘India Gate Basmati Rice' had not been passed on to the consumers as its maximum retail price had been increased since implementation of GST w.e.f. 01.07.2017 and hence margin of profit had also been increased by respondent.
Held: India Gate Basmati Rice sold by respondent was not liable for tax before implementation of GST and after coming into force of CGST Act, 2017, it was levied @5% w.e.f 22.09.2017 with eligibility to avail ITC. It is apparent from the returns filed for the months of September to November 2017 that the ITC available to the respondent as a percentage of the total value of taxable supplies was between 2.69% to 3% whereas GST on the outward supply of Basmati Rice was 5% which was not sufficient to discharge the tax liability. Moreover, in this case rate of tax has been increased from 0% to 5%. Furthermore, there was an increase in the purchase price of paddy in the year 2017 as compared to its price during year 2016 which constitutes the major part of the cost of the product. Therefore, there appears to be no reason for treating the price fixed by respondent as violation of the provisions of the anti-profiteering clause.
4. Rishi Gupta Vs. Flipkart Internet (P.) Ltd. [(2018) 95 taxmann.com 221 (NAA)]
Facts: The Applicant had ordered a Godrej Interio Almirah through respondent and tax invoice dated 7-11-2017 was issued to him for an amount of Rs. 14,852 by supplier but at time of delivery another invoice dated 29-11-2017 was issued by supplier for an amount of Rs. 14,152 and applicant had alleged that he had paid an amount of Rs. 14,852 to respondent and by not refunding differential amount, respondent was resorting to profiteering which amounted to contravention of provisions of Section 171.
Held: It was held that difference in price was due to different rate of GST on both dates and supplier had charged correct rates of GST which were prevalent at time of placing of order and supply of Almirah through two invoices and, therefore, no illegality had been done by supplier while executing order placed by applicant and allegation of violation of provisions of Section 171 was not established.
Comments and Conclusion:
There is no doubt that the government in all its earnestness is trying to deal with the profiteering during this phase. Following proactive steps need to be taken by the government to remove the uncertainties and regain the confidence of the businesses.
- The government should come up with a clear and certain methodology that takes care of interests of the consumers and businesses too.
- The government’s objective must be not to control the excessive profits but to control the prices of the products. If the business is able to control its products’ cost and still able to earn high profits, then the business must not be charged with the anti-profiteering provision.
- The product specific approach should be kept in mind like the one followed in Australia instead of class of products approach.
- Breathing space must be given to the businesses who are affected by the inflation and should be protected from unnecessary crackdowns.
- Qualitative measures should be adopted like consumer awareness programmes, inviting big corporates for their commitment towards anti-profiteering like Australia did by inviting big corporates on board and made them sign ‘Public Compliance Commitment (PCC)’.
Cautions for the Taxpayers:
Some of the steps that the entities must follow in case of lowering of tax rates and avoid the unwanted dispute of anti- profiteering are as follows:
- Supplies for the time being may be kept on hold till the time reduced rates are coming in operation to avoid any rate dispute on old and new stocks in the market.
- Price changes must be displayed by the retailers and billing must be done as per the changed prices with new tax rate applicable (as practiced in Australia).
- Necessary advertisements in newspapers of national and regional/local languages must be given to create awareness amongst consumers as regards reduction in rates and corresponding changes in pricing of goods.
- Keep necessary back up documentation and working handy as to the computation of cost pre-reduction and post-reduction of GST rates.
- Keep track of market trends and implications thereof on prices of goods, if any.
- Prices of major raw materials, inputs pre and post reduction of prices must be recorded properly so as to substantiate their effects in fixing prices of goods.
A2Z Taxcorp LLP I Tax and Law Practitioners , firstname.lastname@example.org
DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.