Anti-Profiteering Clause – A Boon or Bane

Recently, the Delhi High Court has in the case of Reckitt Benckiser India (P) Ltd. vs. UOI [W.P. (C) 7743/2019] upheld the constitutional validity of the anti-profiteering clause, while expressing concerns over the arbitrariness of its application.

However, is the anti-profiteering clause really effective, or is it far away from the business realities?

1. What is anti-profiteering – Section 171(1) of the CGST Act, deals with anti—profiteering which reads as under:

• 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

A reading to section 171(1) of the CGST Act, 2017 indicates that a supplier is expected to pass on the benefit of tax to the receiver by way of reduction in prices of the supply under two circumstances:

• If there is a reduction in the rate of tax on the said supply;

• If the input tax credit is made available in connection with a supply on which input credit was not available previously.

Sub-Section 2, 3 and 3A of Section 171 deal with the constitution of National Profiteering Authority and their powers.

2. Let’s understand the anti-profiteering law with an example: Suppose the cost of a phone after adding a profit of Rs.5 is Rs.100 and the rate of tax is at 18%. The supplier would charge Rs.118 in total i.e. (Rs.100+18% GST) = Rs.118.

Assuming, the rate of tax on phone has been reduced to 5%. Now Section 171(1) of the CGST Act, requires the supplier to sell the phone at Rs.105 i.e. (Rs.100+5% GST), therefore leading to a benefit of Rs.13 being passed on by the supplier to the recipient.

3. Further Rule 126 an 127 of the CGST Rules, 2017 read as under:

• Rule 126 of the CGST Rules, 2017 – Power to determine the methodology and procedure which reads as under:

126. The Authority may determine the methodology and procedure for determination as to whether the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices

• Rule 127 of the CGST Rules, 2017 – Further, Rule 127 of the CGST Rules, 2017 gives the following powers to the anti-profiteering authority:

1. To determine whether any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in prices;
2. To identify the registered person who has not passed on the benefit of reduction in the rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices;
3. To order,

• Reduction in prices;

• Return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of eighteen per cent. from the date of collection of the higher amount till the date of the return of such amount or recovery of the amount not returned, as the case may be, in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the Fund referred to in section 57;

• Imposition of penalty as specified in the Act; and

• Cancellation of registration under the Act.

4. FAQ Released By The CBIC: An FAQ in connection with the anti-profiteering law has been released by the CBIC and question no.12 of the FAQ reads as under:

Q 12. What is the methodology to identify cases of profiteering?

Ans. Rule 126 of the CGST Rules, 2017 vests the power to determine the methodology & procedure with the National Anti-Profiteering Authority constituted by the Central Government under Section 171 (2) of the CGST Act, 2017. The guiding principle mentioned in the said Rule states that the reduction in tax rate on supply of goods or services or benefit of input tax credit has to be passed on to the recipient by way of commensurate reduction in prices. The methodology and procedure adopted to identify cases of profiteering may vary from case to case, depending upon the facts of the case and the nature of goods or services supplied.

5. The Fundamental Issues With Anti-Profiteering Law:

A. Mechanism To Implement The Law Has Not Been Laid Down – A reading to the above rules and FAQ clearly indicates that while the law for passing on the benefit of a tax rate reduction or availability of input tax credit has been framed, the power to determine the methodology and procedure to do so has been vested with the officer without laying down any specific mechanism to identify a lot of practical issues like:

• The mechanism to determine the actual availability of a benefit to the supplier in the first place for him to pass it on,

• Circumstances under which benefit shall be passed on,

• Circumstances under which a mere tax rate reduction or availability of input tax credit may not necessarily constitute a benefit to be passed on,

• Quantum of benefit to be passed on,

• Mechanism to arrive at the quantum of benefit to be passed on etc.

B. Is Tax The Only Driving Force To Determine Cost? – As stated above, the anti-profiteering clause directs a supplier to reduce the cost of supply based on reduction in tax rate or availability of ITC. However, the clause does not take into consideration the other factors that influence cost of supply. From a business perspective, tax is not the only driving factor to decide the cost of supply of a product or service. There are several other factors that are taken into consideration while deciding the cost of supply viz. cost of raw material, cost of labour, transportation cost, currency fluctuation in case of imports etc.

An increase in the cost of all the other factors would automatically lead to a hike in cost of supply. Let’s take the example mentioned above to understand the scenario better.

In the above mentioned example, the net cost of the phone was Rs.100, wherein, say the transportation cost was Rs.5, profit was Rs.5 and the rate of tax was 18%. The supplier would charge Rs.118 in total i.e. (Rs.100+18% GST) = Rs.118.

Therefore, the cost of the phone excluding transportation and profit margin is Rs.90 (100 – Rs.5 transportation cost – Rs.5 profit margin)

Let’s say, now the cost of transportation has increased to Rs.20 i.e. an increase of Rs.15, and the tax is reduced to 5%. Now assuming the profit is still Rs.5, the supplier would charge Rs.115 i.e. [Rs.90 + Rs.20 transportation cost + Rs.5 profit margin] +5% GST = Rs.121 approximately.

A look at the workings clearly indicates that the cost of supply was Rs.118/- when the GST was 18%, and it went up to Rs.121/- despite a reduction in the rate of GST to 5%. However, the fact is that the increase in cost of supply was on account of an increase in the cost of transportation.

Also, what happens if the suppliers brand is growing and the supplier therefore decides to charge a premium to avail supply of goods or services?

Despite the above facts, there is every possibility for the supplier to receive a notice citing a reduction in rate of tax, simply because the anti-profiteering law considers the rate of tax to be the only driving factor to determine cost and mandates reduction in prices accordingly, and while it can be argued that the supplier can explain his stand, the basic question is that, why should a supplier be subject to the tedious process of litigation in the first place.

• Conclusion:

The intention behind the anti-profiteering law may be good, but neither the industry nor the laws can rely on intentions for the economy to run in a stable manner. Effective laws with effective mechanism for its implementation are what will make the purpose of the law achievable.

The anti-profiteering clause can be very effective if there is a proper mechanism laid down for its implementation, instead of simply leaving it to the officers to determine based on their understanding.

However, the anti-profiteering law in its present form and structure is fundamentally flawed as it does not taken into account the various factors that go into deciding the cost of a supply. While rate of tax and input tax credit do play a role in deciding the cost, they are not the only factors and that’s where the anti-profiteering law fails.

Insofar as benefit to the customers is concerned, in reality the market dynamics and business competition will take care of the same in the long run. Normally when a supplier decides the cost of supply, a lot of other factors apart from the monetary factor also go into consideration like the goodwill of the brand, cost of supply by the competitors etc.

Ideally, the anti-profiteering law in force today ought to have been struck down, but unfortunately the Delhi High Court upheld its constitutional validity. Tough times ahead for the industry.

Rupesh Sharma
Advocate practising in Chennai

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