5 years of GST: Profiteering charges leave many companies perplexed

No structured guidelines for firms to avoid profiteering; standard method to compute undue profits, say experts

The National Anti-Profiteering Authority (NAA) is hearing a case against a real estate company, which has allegedly not been passing on the benefit of input tax credit (ITC), arising out of goods and services tax (GST), to homebuyers.

The investigating body for this -- the Directorate Generate of Anti-Profiteering (DGAP) -- shot off e-mails to more than 500 buyers, asking them if they got the benefit of ITC through cost reduction, and whether the discount was communicated to them as rate reduction due to GST. Over 50 responses were received. Of those, 40 said they had benefited from GST rate reduction while 10 replied in the negative.

The DGAP concluded profiteering by the real estate firm.

The DGAP compared eligible ITC before the introduction of GST with what prevails now. The eligible ITC that builders can get after GST came has to be passed on to customers without considering factors such as the status of construction, receipt of money, and other business factors.

The provisions in the Central GST Act state that reduction in GST rates or the benefit of ITC must be “commensurately” passed on to consumers.

In the past five years, neither legislators nor regulators have not been able to frame rules/regulations on the methodology for computation profiteering and specify a threshold for applying these provisions, said Rajat Mohan, partner at AMRG & Associates.

Although the GST law provides for anti-profiteering, the guidelines for its applicability are missing, which is a concern for companies, said Abhishek Jain, partner at KPMG.

Queries sent to the National Anti-Profiteering Authority did not elicit a response.

Companies in India have challenged the constitutional validity of the anti-profiteering provisions and say they have the right to determine product pricing independent of GST provisions, Jain said. Many high-selling products earn companies high margins, which are sometimes adjusted against low-margin products that sell less, and this is business practice, Jain said. Not just goods, pricing works differently for services, which is dependent on demand. The anti-profiteering provisions do not specifically provide that benefit is to be passed at entity level, product level, or even further at stock-keeping unit (SKU) level, which is a problem, Jain said.

This has led to a barrage of cases filed by companies, including the real estate firm mentioned earlier, against the anti-profiteering authority, challenging its constitutional validity in various high courts. Many companies, mostly in the fast-moving consumer goods sector, among others, have moved the Delhi High Court and challenged the anti-profiteering provisions. Many more petitions are pending in other high courts.

The National Anti-Profiteering Authority is also learnt to have approached the Solicitor General to defend it.

An Indian anti-profiteering agency is back in action to wind up the pending cases. However, the bulk of the disputes are far from closure as most businesses are going to court, said Mohan from AMRG & Associates. 

“Aggrieved businesses, before approaching court, have pleaded legal and fair arguments to the DGAP and NAA; however, all are falling on deaf ears,” Mohan said.

Without following any standard procedure, the DGAP is acting as an agency with unlimited powers, intending to prove that every consumer-centric business has defrauded its customers by overcharging, Mohan said.

In 2019, after having passed 65 orders, involving a profiteering sum of ~606 crore, the National Anti-Profiteering Authority proposed a standard operating procedure (SOP) for Central GST and State GST officers for verifying profiteering as soon as any GST rate reduction or additional ITC benefits are provided. These included a procedure for record keeping, identifying suppliers, collecting data, making mock purchases to collect invoice for evidence, and visiting premises.

As the tenure of the National Anti-Profiteering Authority ends in November 2022, and several cases are pending with it on alleged profiteering along with others challenging its own legal validity, the Centre is considering a proposal to merge it with the Competition Commission of India (CCI). Once GST rates stabilise, the role of the authority would become redundant.

“With the reduction in GST rates not likely, the future applicability of the anti-profiteering provisions seems to be constrained. As such, the National Anti-Profiteering Authority’s role will be limited to situations where there is change in GST law, leading to cost reduction for businesses,” Jain said.

The Legal Tussle

• Provisions in the Central GST Act say reduction in GST rates or the benefit of ITC must be passed on to consumers
• Companies in India have challenged the constitutional validity of anti-profiteering provisions
• Without following any standard procedure, the anti-profiteering body is acting as an agency with unlimited powers, say experts