Profits may not always be Profitable: Anti-Profiteering measures in GST | H&R Block | Blog

Profits may not always be Profitable: Anti-Profiteering measures in GST

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Profits may not always be Profitable: Anti-Profiteering measures in GST

GST v/s Cascading Effect

Indian Indirect Tax regime before the introduction of GST was suffering from cascading effect (i.e. tax on tax) of taxes. The Cascading effect increases the cost burden on the end user. It makes products/services more and more costly as the tax paid at one stage is not available at a later stage.

Goods and Service Tax (GST) is being introduced in India to serve as the primary vehicle to remove cascading effect. Removing of cascading effect will decrease the cost of products/ services as tax on any input or input service utilized during the process of manufacturing of product or providing of service is available as Input Tax Credit to offset it against the output tax payable subsequently (ITC Concept).

As one of the primary objective is to remove the cascading effect, it is necessary to ensure that the ultimate benefit of GST is being passed on to the end user instead of just filling out the pockets of the dealers/service providers.

Proactive Measures taken by Govt. to avoid Price Exploitation

There could be cases where a dealer in the supply chain takes the benefit of Input Tax Credit(ITC) or reduction in tax rate and not pass such benefit to end customers by hiking up his profit

To ensure that benefits of ITC or reduction in tax rates reach to the end customers, GST authorities introduced a provision regarding Anti-Profiteering measure. It is not a new concept. Australia and Malaysia are closest international examples. These countries have also witnessed a significant increase in inflation for a period after implementation of GST. This makes it more important for Indian administrators to keep tabs on prices after implementation of GST.

What is Anti-Profiteering?

Profiteering means distribution of large or unfair profit disproportionately often through manipulation of prices, abuse of dominant position, or by exploiting a bad or unusual position such as temporary scarcity. In simple words, it involves making large profits by charging high prices for goods that are hard to get. Therefore, to eliminate this distribution of unfair profit, authorities inserted Clause 171 in the GST act known as Anti Profiteering. The main idea is that the taxable person should pass on benefit of reduction in rate of tax on any supply of goods or the benefit of input tax credit to the customer as reduction in prices. Under Anti-Profiteering provisions, its illegal for a business to not pass on benefits of GST rate benefits to the end consumer and thereby indulging in illegal profiteering.

Procedure to Regulate Anti Profiteering

1. Constitution of Authority

The National Anti-Profiteering Committee is a 5-member committee consisting of

  1. Chairman and
  2. four technical members who are or have been commissioners of state tax or central tax or have held an equivalent post under existing laws.

The authority determines methodology and procedures to determine whether the reduction in the rate of supply and benefit of ITC has been passed on to the end consumer by reduction in prices.

2. Duties of the Authority

  1. To determine whether any reduction in the rate of tax on any supply of goods or services or the benefit of ITC has been passed on to the end consumer.
  2. To identify the registered or taxable person who has not passed on the benefit.
  3. To order
  4. Reduction in price
  5. Return to the end consumer, an amount equivalent to amount not passed by way of reduction in prices along with the interest at the rate of 18%
  6. Imposition of Penalty
  7. Cancellation of Registration

 

3. Application to the Authority

First, Applications will be scrutinized by the standing committee within 2 months. Applications from interested parties of local nature will be scrutinized by State level Screening Committee and then forward to Standing Committee for further action.

The Standing Committee will scrutinize the cases. If prima facie evidence of profiteering is found, the matter shall be referred to Director General of Safeguards. The Director General of Safeguards will issue a notice to interested parties who have information and will collect evidence within 3 months. The parties will provide information on a confidential basis. He can take assistance or opinion of any other agency or statutory authorities in discharge of his duties. He must complete the investigation within 3 months and submit his report to Authority.

4. Order of the Authority

On receipt of the report of Director General of safeguards, the Authority will give an opportunity for hearing to interested parties. After Investigation and hearings, the Authority can pass a suitable order. The Authority can also direct any authority of Central tax, State tax or Union territory Tax to monitor the implementation of the order passed by it.

5. Tenure of Authority

The Authority shall cease to exist after the expiry of 2 years from the date on which the chairman enters upon his office unless the council recommends otherwise.

Note: Interested Parties means Suppliers or Recipients of Goods or Services under the Proceedings.

Recent Actions for Anti-Profiteering

Anti-Profiteering Notices were served to 5 companies including a Honda Dealer, Hardcastle Restaurants, McDonald’s franchisees for West and South India and retailer Lifestyle for not passing on GST benefits to consumers according to information on Director General of Safeguard’s Website. These companies were asked to submit copies of Balance sheets, Profit and Loss Account statements for 2016-17, GST Returns for July- December, details of Invoice- Wise outward taxable supplies, two sample invoices for sales and purchase of goods each and price list before and after November 15 by the authority. In all these cases, the complaints have been vetted by the Standing Committee on anti-profiteering, for which a penalty has been prescribed in the law.

It is always better to take preventive measures rather than to take corrective measures. Anti-profiteering measure is an appreciable pro-active measure taken by introducing the provisions in GST legislation. However, it may be very difficult to determine whether the profits are reasonable or unreasonable due to GST impact as no methods have yet been prescribed to measure the same.

In view of the above, we can say that “profits are profitable, but undue profits may result in losses”. The outcome of proceeding started against McDonald, Hardcastle etc. for Anti-Profiteering will set an example for other market players. This will definitely motivate other companies to pass the maximum benefits of GST to end consumer despite of converting them into profits.

Anti-Profiteering measures and the proceedings initiated by the Committee is a welcome move which may help in controlling of inflation which may otherwise arise due to unfair profiteering.

Priya Goel
Priya Goel
Priya is a Chartered Accountant working in the field of Indirect Taxation (GST) since the last 2.5 years. She has handled various clients in the manufacturing and service sectors and has represented them in audit and scrutiny cases. She has also assisted her team at H&R Block as a Business Analyst for the GST software. As a Tax Researcher, she aims to provide her team with all latest notifications, circulars, amendments and her clients with her expertise in planning and managing tax related issues in the most efficient and structured manner

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