Topic : GST investigation arm finds FMCG firm P&G India guilty of profiteering
Topic in Syllabus: General Studies Paper 3: Indian Economy
The GST profiteering investigation arm has found leading FMCG firm P&G India guilty of not passing on GST rate cut benefits to the tune of about Rs 250 crore by commensurate reduction in prices.
More about on news:
- The DGAP report has concluded profiteering worth Rs 250 crore by P&G.
- The National Anti-Profiteering Authority will pass a final order on the quantum of profiteering after hearing the company’s views
- As per GST anti-profiteering rules, companies have to pass on the benefit of reduction of taxes to consumers by way of commensurate cut in product prices.
- There have been complaints from consumers that the firms have increased the base price of products and then charged the lower GST rate, thereby keeping the MRP of products the same in pre and post-tax rate cut.
National Anti-profiteering authority:
- This is a new concept being tried out for the first time. The intention is to make it sure that whatever tax benefits are allowed, the benefit of that reaches the ultimate customers and is not pocketed by trade.
- While every business would like to earn more and more profits from business, given an opportunity, it is a fact that GST is a new concept being introduced in India for the first time and is claimed as a major tax reform.
- That experience suggests that GST may bring in general inflation in the introductory phase. The Government wants that GST should not lead to general inflation and for this, it becomes necessary to ensure that benefits arising out of GST implementation be transferred to customers so that it may not lead to inflation.
- Anti-profiteering measures will help check price rise and also put a legal obligation on businesses to pass on the benefit. This will also help in instilling confidence in citizens.
- Global experience suggests that anti-profiteering provisions are only effective if there is a significant lead-in time to allow the relevant authority to educate consumers and businesses as to their respective rights and obligations.
- The concept of anti- profiteering provision has been perhaps borrowed from Australia which was the first country to enact similar provisions when it replaced a series of inefficient taxes with a GST in July, 2000.
- The power has been given to Central Government to constitute an authority to oversee whether the commensurate benefit of allowance of input tax credit or reduction in the tax rates have been passed on to the final customer.
- The authority constituted by the Central Government will have the power to impose a penalty in case it finds that the price being charged has not been reduced consequent to reduction in rate of tax or allowance of input tax.
Constitution of the National Anti-Profiteering Authority:
- NAA is an apex body with an overarching mandate under Goods and Services Tax (GST) regime so as to ensure the benefit of tax reaches consumers.
- The NAA will be headed by a senior officer of the level of Secretary to the Government of India. There will be four Technical Members from the Centre and/or the States.
- The Chairman and Members of the Authority shall be appointed by the Central Government on the recommendations of a Selection Committee to be constituted for the purpose by the Council.
- The Council may constitute a Standing Committee on Anti-profiteering which shall consist of such officers of the State Government and Central Government as may be nominated by it.
- The Authority shall cease to exist after the expiry of two years from the date on which the Chairman enters upon his office unless the Council recommends otherwise
- The Additional Director General of Safeguards under the CBEC (Board) shall be the Secretary to the Authority.
- A State level Screening Committee shall be constituted in each State by the State Governments.
- The Chairman shall hold office for a term of two years from the date on which he enters upon his office, or until he attains the age of sixty- five years, whichever is earlier and shall be eligible for reappointment.
- A person shall not be selected as the Chairman if he has attained the age of sixty-two years.
- The Technical Member of the Authority shall hold office for a term of two years from the date on which he enters upon his office, or until he attains the age of sixty-five years, whichever is earlier and shall be eligible for reappointment.
Statutory Provisions of Anti-Profiteering Authority:
The following is the text of section 171 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.
- The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether 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.”
- Section 171 provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.
- Section 17 on anti-profiteering shall have a sunset clause. The rules framed for anti-profiteering as approved by the GST Council indicate that it would operate for a period of only two years. Thus, it would lease to exist after two years of being in force.
Powers and Functions:
The Authority would have the following duties:
- 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.
- 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.
- The power to take action are also listed as duties whereby it can order price reduction, refund of profit, recovery, penalty or even cancellation of GST registration.
- NAA has Power to cancel Registration of Assesse:Anti-Profiteering Authority (APA) shall act as a monitoring and regulatory authority to curb anti-profiteering practices of tax payers under GST regime. The APA shall be duty bound to:
- Make company reduce the prices
- Make company refund the money to the consumer along with interest @ 18% per annum
- Order company to deposit the refund amount in the Consumer Welfare Fund (in case the buyer is not identifiable)
- Impose monetary penalty equivalent to amount involved in undue profiteering
- Cancel registration of the assesse
- NAA can issue the orders: The orders passed by the APA shall follow the principles of natural justice and as such, opportunity of being heard shall be provided. The rules are silent on further appeal against orders of APA. Nor does it stipulate that such orders shall be final. It provides that orders passed by APA have to be complied with immediately by the registered person.
- Within 3 months of report of DGS
- Opportunity of being heard
- By majority in case of difference of opinion
- Compliance by registered person immediately
- No clarity on whether order appealable or not
- Monitoring functions:The Authority under section 171 shall have the following monitoring functions :
- Input tax credit availed by taxpayer have actually resulted in commensurate reduction in price of goods / services
- The reduction in prices on account of reduction in tax rates have actually resulted in a commensurate reduction in price of goods / services.
- NAA can impose of penalty as specified under the Act.
Issues & Challenges of NAA:
- Computational Mechanism:
- Practically it is very difficult to establish one to one correlation between ITC on inward supplies and Tax payable on outward supplies. So ultimately it comes on margins or prices of supply. How the margins and prices are to be checked is a subjective matter.
- Further apart from benefits in terms of better credit chain, the business organizations are going to incur huge cost for implementation of GST on account of installation of new IT systems, restructuring of operations, redesigning of SOP’s, Compliances cost etc.
- Determination of Price: One fact needs to be noted that prices and margins are not solely dependent on taxes. Rather they are only a component of price like any other components. Price determination depends on many factors such as:
- Internal factors:
- Cost of raw material or other component
- Predetermined objectives (Higher profit or higher revenue)
- Image of the Seller (Goodwill)
- Life cycle of the product (Initial level may be less priced or even free sample after that there may be increase in price)
- Credit period offered.
- Promotional activities (Heavy advertisement/ promotional exp.)
- External factors:
- Consumers (price sensitivity & purchasing power of buyer)
- Government Control.
- Economic Condition (Recession)
- Supply Chain (Longer the chain, higher would be the price)
The reasons for Companies fretting about Anti-profiteering law:
- No clear cut mechanism for determining anti-profiteering
- Rules only outline the procedure to be followed for investigation and enquiry
- Discretionary powers to bureaucracy to arrive at commensurate reduction under the Central GST Act
- Vulnerable to legal challenge questioning ‘excessive delegation’ by Parliament
- No clarity on whether de-registered firms can re-commence business
- Once a profiteering complaint is received against a company, the DGAP has the powers to look into the books of accounts and see if the benefits of tax rate cuts have been passed on in other products manufactured by the company as well.
- After studying the documents, the DGAP gives its report to the National Anti-Profiteering Authority (NAA) for further action.
- If the NAA finds a firm guilty of profiteering then the amount profiteered has to be refunded to consumers by the company. In case where the consumers cannot be identified, the amount has to be deposited into the consumer welfare fund of the Centre and states.
- In December 2018, the NAA had found another FMCG firm HUL guilty of profiteering of Rs 535 crore by not passing on tax rate cut benefits to consumers on its range of products.
What does anti-profiteering mean in relation to GST?Discuss the powers and functions of National Anti-Profiteering Authority.