VOLUME IV INDIAN JOURNAL OF TAX LAW 2018

COMMENT: GOODS & SERVICES TAX LOADED WITH A MISSILE OF ANTI-

PROFITEERING TO CURB UNJUST PROFIT

- Anandaday Misshra*

ABSTRACT

India witnessed the biggest tax regime change with transition from Excise & Service tax to
Goods & Services Tax (GST) with effect from 1st July 2017. The change was so dynamic that
it could lead to boosting the GDP of India and also result in changes in price of goods and
services. However, business transactions saw a different trend. A prominent change was the
introduction of anti-profiteering. The intention is that no business should take undue benefit
of such a change in the taxation regime. The macroeconomics of pricing of goods and
services are under the scanner for the first time in India. The focus of the Government of
India is that, if there is a reduction in tax rate, then the benefit of reduction should be passed
over to the consumer. With anti-profiteering measures being introduced, no business can
retain any benefit or profit accrued due to a reduction in the rate of tax and ultimately
leading to reduction of its price of goods or services. It can be said that unjust enrichment in
profit is under curb by anti-profiteering measure. In addition to the above, these are
measures to keep a check on inflation due to changes in pricing with the onset of new tax
regime of GST.

MECHANISM

The legal basis for regulating anti-profiteering can be found under Section 171 of Central
Goods and Services Tax Act, 2017 (“Act”) which states “any reduction in rate of taxon 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.”

On perusal of the same, it can be understood that the word deployed is “recipient” and it
conveys a recipient-centric approach rather than a consumer-specific approach. Hence,
provisions of anti-profiteering aims to safeguard the interest of every person in the supply
chain as a recipient.

*
Founder Advocate, AMLEGALS Legal Strategists, Attorneys & Advisors

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IV PROFITEERING TO CURB UNJUST PROFIT

APPLICABILITY ON B2B OR B2C

There are two schools of thought thriving upon the word “recipient”. One, which states that it
is intended for B2B (Business-to-Business) models and other, which states it is meant only
for B2C (Business-to-Consumer) models. The intent and object of the legislation can be
found from the text of Section 171 itself. The contextual interpretation conveys the purpose
this curbing provision serves and what it intends to achieve by way of implementation at any
given point of time. The word i.e. “recipient” has been used in Section 171 of the Act. The
word “recipient” represents a broader class and can be said to include various class i.e.
“customer”, “end-user”, “consumer” , “any recipient” etc.

PASSING OF BENEFIT

The crux of anti-profiteering is based on a simple observation that the passing of benefit
should occur with every reduction in tax rate and/or due to benefit of input tax credit. The
passing of benefit has also been implemented by other ministries to align it with declaration
of every price reduction or enhancement by way of an advertisement in public domain.

The printed price on label is also being monitored. It must be noted that for the first time
citizens and/or recipients have also become active to point out any or every disparity in price
to the notice of the concerned authorities.

REVISITING OF EVERY CONTRACT

Every business organization needs to be extra vigil towards their existing and upcoming
contracts. It is high time when various provisions pertaining to anti-profiteering and related
clauses of GST have to be factored, amended and/or included in the body of the contracts so
that various unforeseen damages or liabilities can be prevented well in advance. Since the
implementation of GST, every contract should be holistically vetted and redrafted as lot of
loopholes remains in every contract under the GST regime.

It must be realized and noted that is not a matter of inclusion of one clause for GST in a
contract but an exhaustive inclusion has to be done before it is too late, as after all, contracts
are the heart and soul of any business.

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ARTIFICIAL INTELLIGENCE

Various committees have already been working on artificial intelligence for certain sensitive
sectors. This sector-specific intelligence has been mobilized to keep a check on various
factors including the macro elemental aspects of pricing after change in rate slabs for various
goods and services. The reduction of prices in many sectors and statistics has already been
tabled, and actions are being initiated at every possible level.

PRICING - INTRINSIC & EXTRINSIC FACTORS

Determination of Price is based on various intrinsic and extrinsic factors grounded on price
dependency factors. Such as:

 Cost of raw material or other components

 Predetermined objectives (Higher profit or higher revenue)
 Image of the Seller (Goodwill)
 Life cycle of the product
 Credit period offered.
 Promotional activities (Heavy advertisement/promotional exp)
Whereas, Extrinsic factors being such as:
 Competition
 Consumers (price sensitivity & purchasing power of buyer)
 Government Control
 Economic Condition (Recession)
 Supply Chain (Longer the chain, higher would be the price)
 New business model
 Consolidation
Companies should keep all factors very simple and account for all the factors in a logical
manner rather than in panic at any given point of time.

HOLISTIC APPROACH

It won’t be wrong to claim that practically, it is very difficult to establish a one-to-one

correlation between Income Tax Credit (ITC) on inward supplies and the tax payable on
outward supplies.

However, companies as well as concerned anti-profiteering authority will have to deploy a

holistic approach in screening of the margins and inbuilt factors towards the prices of supply.

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IV PROFITEERING TO CURB UNJUST PROFIT

A holistic approach comprises of 3 factors which has to be developed:

 Profit on product in absolute terms.

 Profit percentage on Cost of product.
 Profit percentage on Sale Price.
Of late, it has been observed that companies are either not clear on anti-profiteering or they
have been guided in such a manner that the intrinsic and extrinsic factors have been confused
while giving effect to the new pricing system especially in board meetings that in panic,
decide to either pass over extra benefit or are still in dilemma as to what shall be their actual
pricing.

RECENT DEVELOPMENTS

On 9th February 2018, the Union Finance Minister, Mr. Arun Jaitley, informed the Parliament
of India that notices have been issued for initiation of investigation in 9 cases under anti-
profiteering provisions of GST. As on 31st January 2018, 221 anti-profiteering applications
have been received by the Standing Committee and State Screening Committees. In a written
reply, Mr. Jaitley further said that to protect the interest of consumers, the government has
directed manufacturers, packers, importers of pre-packaged commodities to declare the
revised retail sale price after the implementation of GST by way of stamping, stickering or
printing.

It is further noted that till 31 st March, 2018, a large number of notices on anti-profiteering
have been issued to companies in every sector, and this can further lead to audit as well as
further complications. The Authority can determine the methodology and procedure for the
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.

CASE STUDIES

On the basis of various pieces of advice and opinions given on anti-profiteering to various
companies so far and coupled with a study on anti-profiteering measures in other parts of the
world, it can be found that the common problems related to anti-profiteering are:

i. Biased accounting,
ii. ITC miscalculation,

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iii. Faulty costing,

iv. Extrinsic & intrinsic factors neglected or not properly accounted for
v. Pre & post GST pricing policy
vi. Lack of a system
vii. Un-organized Process
viii. No accountability
ix. No review & track
x. No income tax validation
xi. Communication gap between inventory, finance, costing, marketing, SCM
departments

Companies should deploy artificial intelligence as a priority to identify the missing link.
Overall, the common and logical issues were either neglected and/or not even considered and
dealt properly while opting for GST implementation. In majority of cases, the sole reliance
upon the forward manner of costing has backfired whereas backward costing was also to be
understood for every correct costing by applying all extrinsic and intrinsic factors which has
actually surfaced after GST.

CONCLUSION

It is realized that the onus of passing of the benefit to the recipient will lie upon the
companies who have to do so at their end. The million dollar question still prevails as to how
the authority will decide that the reduction of tax has actually being transferred or not
because the price of each product differs according to the demand and supply.

The quest at the end of investigators and companies will be to find out the actual cost before
GST and whether any price is increased or decreased post GST either due to ITC and/or the
change in the rate of tax.

Above all, on first hand companies will have to substantiate, ensure and satisfy the authorities
that suitable pass over of every decrease in prices as an after effect of GST have been given
effect to and the profits earned are not due to tax arbitrage, but either as a cost plus amount or
as function of prevailing market prices.

Every business entity must take an informed decision as anti- profiteering will emerge as one
of the biggest grey areas in near future under the tax regime of GST. The golden advice on
anti-profiteering is to “keep your calculation simple, have proper IT validation, avoid

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IV PROFITEERING TO CURB UNJUST PROFIT

artificial aspects and emphasis should be to find out the micro and macro factors with its
effect after GST.” The change in price should be also declared in proper manner failing
which the failure of compliance will also bring new complexities.

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