Shall Consumers Reap the Benefits of Reduced GST Rate

Goods and Service Tax (GST) was levied in India from 1st July 2017 through 101st Amendment in the Constitution. The Four Tier GST structure was introduced with a minimum rate of 5% and a maximum of 28%. The consumer of the commodity at each successive level can claim the Input Tax Credit of the GST paid. However, have you ever thought that in case of a reduction of GST rate, would the benefit of reduced tax rate pass on to the next consumer. What is the Government action plan for passing on the benefit? To know about it in detail, read the article.

Shall Consumers Reap the Benefits of Reduced GST Rate

Introduction:

Goods and Service Tax (GST) was introduced in India in 2017, which was one of the biggest tax reform for independent India. The primary objective behind the introduction of GST was "One Nation One Tax", a Destination based tax that is levied at every stage of value addition.

Another objective of GST was reducing the cascading effect of taxes which occurs due to levying of multiple taxes. Now, as the GST is levied at every value addition stage, this increased in price of goods/services. In order to avoid this issue Input Tax Credit (ITC) was introduced. The immediate consumer will be entitled to take ITC on the tax paid by him.

Every year the GST Council revises the GST rate leviable on the goods and services as per the business requirements, to ensure that the benefit of the reduced tax rate is passed to the Consumer. Anti Profiteering measures were introduced by the Government in the year 2017 for upto 30th November 2019, which has now been further extended up till 30th November 2021.

What do you mean by Profiteering?

When a person illegaly makes profits, it has been termed as Profiteering. In the year 2010 a report titled "Implementation of Value Added Tax in India- Lessons for Transition of GST" released by Comptroller and Auditor General of India, the report stated that despite in reduction of tax rates the manufacturers have not passed the benefit of tax reduction on to the next level consumer, this has been termed as Profiteering. As learning obtained from VAT, it was decided that GST would be brought into force along with its Anti Profiteering measures. This can be better understood with the help of an example, suppose Mr. Raj manufacturer of a refrigerator brand in India registered in Delhi, supplies the model XY12 at an MRP of Rs. 12,800.00 inclusive of 28% GST, so retailer Mr. Anand registered in Mumbai used to pay Rs. 12,800.00 and would claim ITC of Rs. 2,800.00. In its annual meeting, GST Council has revised the GST Rate to 18%, so this reduction in the rate would reduce the MRP to Rs. 11,800.00 and the retailer Mr. Anand would claim ITC of Rs. 1,800.00. If not so, then this would be considered as Profiteering.

Statutory Mechanism under GST Law for Anti Profiteering:

As per section 171 of the Central Goods and Service Tax Act, 2017 states that a benefit of reduction in the tax rate should be passed on to the recipient, through the reduction in the MRP of the goods/services and authority shall also examine the benefit of the reduced tax rate on Input Tax Credit availed.

Section 171(3A) of the Central Goods and Service Tax Act, 2017after conducting of examination by the authority, if a person has been held liable for profiteering, he shall be held liable for a penalty equivalent to the 10% of the amount profiteered. However, he shall be exempted from the penalty, if the profiteered amount is deposited within 30 days of the Order.

As per Rule 126 of the Central Goods and Service Tax Rules, 2017authority can determine the procedure for determining whether the benefit of reduced GST rates has been passed on to the buyer.

What is an Anti Profiteering Mechanism?

Under the GST Act, the supplier of the goods and services ought to pass the benefit of reduction in GST rates to the customer by changing the MRP and the benefit of reduced tax should also be passed in the calculation of Input Tax Credit. For the regularization of the mechanism the National Anti Profiteering Authority has been formed, there is Directorate General of Anti Profiteering and a Standing committee and a State Screening Committee in case of profiteering activity the customer has a right to file a complaint against the supplier in the prescribed format.

What is a National Anti Profiteering Committee and what’s its constitution?

The National Anti Profiteering (NAA) Committee is a regulatory mechanism under the GST Act to keep a check on the profiteering activities of the suppliers. The NAA was constituted in the 22nd GST Council meeting held in Guwahati.

The authority has the following members:

The motives behind the constitution of NAA are as follows:

  • Identify the person registered under the GST law who has not passed the benefit of the reduced tax rate to its consumer.
  • Order a reduction in the price of goods/services.
  • Imposition of penalty.
  • Return to the recipient the benefit not passed on him due to a reduction in rates.
  • Cancellation of Registration under the Act.

 

Who is the Directorate General of Anti Profiteering and what are his powers?

S.no CGST Rules, 2017 Particulars
1. 129(2)

The Directorate General of Anti Profiteering carries out the investigations, he has the power to investigate the party and call for documents.

2. 129(3)

The rule says before initiation of the proceedings, a notice to the interested parties must be issued.

3. 129(6)

The investigation by him should be completed within a period of 6 months, from the receipt of the reference from the Standing Committee; further extension maximum up to 3 months can be provided.

4. 132

He has the power to summon a person under Section 70 of the Code of Civil Procedure, 1908.

Standing Committee and State Clearing Committee:

The GST Council constitutes a Standing Committee having its members appointed from the Central and State Government. Standing

A State Level Screening Committee is constituted by the State Government, in which one officer is appointed by the Commissioner and one officer of the Central Government is appointed by the Chief Commissioner. Every State should have one State Level Screening Committee.

 As per Rule 128(2) of the Central Goods and Service Tax Rules, State Level Screening Committee looks after the cases of their State for profiteering in case of a reduction of GST Rates, they first review the application received by them within 2 months and in case of profiteering as stated in Section 171 of the Central Goods and Service Tax Act, 2017 the application is forwarded to the Standing Committee.

If the Standing Committee is satisfied regarding the matter for investigation the case is forwarded to Directorate General of Anti Profiteering.

 

WHO CAN FILE AND HOW CAN YOU FILE A COMPLAINT AGAINST PROFITEERING?

  • When a consumer finds that the benefit of reduced GST Rate has not been provided to him by the reduction of the MRP of the Goods/services acquired by him, the consumer can file a complaint against the supplier, or the person cannot avail the correct amount of ITC on the taxes made by him can move against the supplier but with proper evidence.
  • The complaint can be filed online on http://www.naa.gov.in/login.php.
  • The opportunity of being heard will be provided to the person, against whom the complaint has been filed.

REFUND OF AMOUNT IN CASE OF PROFITEERING:

As per Rule 127(iii) (b) of the Central Goods and Service Tax Rules, 2017 the person can claim a refund on the excessive amount paid by him, despite a reduction in the GST rate. A refund will be given along with 18%interest p.a. from the date of payment of excessive amount till the time amount not returned.

If the claim has not been made, the excessive tax collected will be transferred to the Consumer Welfare Fund.

 

MY VIEWS IN FAVOUR:

  • Anti Profiteering is an important change brought out in the GST Law, as not providing the benefit of a reduced tax rate is one of the reasons for inflation.
  • It is a price control mechanism, the imposition of penalty and power for cancellation of Registration has been provided in the Central Goods and Service Tax Act which will act as a strict measure in controlling profiteering.
  • A detailed analysis should be carried out in case of excessive increase in Profit Margin would curb the practice to an extent.
  • Simultaneous check on the MRP provided by the supplier and the ITC claimed by the consumer is a calculative approach towards suppliers from earning illegal profits.

MY VIEWS AGAINST:

  • The proper methodology should have been mentioned in the law, to better understand whether the Profiteering has been committed by the supplier or not. It has just been mentioned that the Anti Profiteering Authority shall determine the methodology for checking the effect of the reduced rates at their own discretion.
  • Article 14 of the Constitution of India bars discrimination and prohibits discriminatory law and administrative actions. There is no clarification about the Authority's proper profiteering mechanism that would affect the party held liable for profiteering, as he would remain unknown to the mechanism followed.
  • The Law only considers for the avoidance of profiteering the prices should be reduced and regarding the ITC availed but ignores the effect of the ITC withdrawal. If we consider the case of Jubilant Foodworks where the NAA passed the order against the company due to profiteering and penalty of Rs. 41.42 Crore was imposed, the company claimed that it reduced the price of their food items with an immediate reduction in the tax rate, but the loss suffered by the company due to withdrawal of Input Tax Credit was higher. Due to this they got denial in case of ITC claimed by them, hence the cost on inputs was increased and they had a loss therefore. The company claimed a loss of 2.4 Crore on their monthly margin. The Order was put on stay later by the High Court. Similarly, many other such cases are pending.
  • Similarly in the case of Patanjali Ayurveda, where the company was fined for 75.08 Crore due to profiteering of Rs. 103.20 Crore in the year 2017. GST rates were reduced to 18% from 28% in 2017 and still, the company did not reduce its product prices. The order was made against them in March 2020, the Company has been asked to deposit the amount along with 18% interest in Consumer Welfare Fund. Patanjali gave a statement in defense that due to an increase in rates earlier as the time of introduction of GST it has also suffered losses as at that time it never increased the price of its products. Similarly Nestle, HUL, etc are some other companies that have been asked to deposit the penalty under Anti-Profiteering Laws.
  • The complaint once filed cannot be withdrawn, in case of Anti-profiteering. The clause regarding the same should have been added allowing for withdrawal of complaint. Considering the case of Xiaomi where the GST rate on power bank was reduced from 28% to 18% effective from 1st January 2019, they had classified the power bank as “Lithium-ion” battery which was already covered under 18% GST so the price was not affected by the reduced GST rate. Still they were sent the notice for profiteering. NAA in its order dated 11th February 2020 dismissed the complaint. Many other such cases are there which are not involved in profiteering; due to lack of clause of withdrawal the cases cannot be withdrawn. So they go up to the level of NAA which is a waste of time of the authority as well as the company.

My Suggestions:

  • The companies cost structure or the cost sheet should also be studied before determining the Profiteering amount.
  • Before the filing of the case against the supplier, the Industry profit margin, price mechanism, etc can be studied.
  • Price fluctuation up to a certain range could be permitted just like Section 50C of the Income Tax Act, 1961 where fluctuation in the sales consideration is allowed up to 5% from the stamp duty value, the same could be added for Anti Profiteering measures.

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