National Anti-Profiteering Authority and the company vs consumer tug-of-war

While businesses have issues with NAA's methodology of computing profiteering, consumers are defending their right to be charged fair prices and are supportive of the authority

A debate over the National Anti-profiteering Authority (NAA) has taken an interesting twist.

So far, companies have been criticising the gaps in the methodology of computing profiteering and have approached Delhi High Court. The court  clubbed 40 such petitions filed by companies such as Hindustan Unilever, Patanjali, Jubilant Foodworks, Reckitt Benckiser, Johnson & Johnson, Phillips and will hear the matter in November.

Meanwhile, consumer advocacy group CUTS International recently said it will intervene in the matter in the High Court to defend consumers’ rights to be charged fair prices and support the Authority.

It will file an intervention application as a consumer organisation in the court and implead itself as a party in the matter.

As such, the two sides have their own arguments on NAA. Meanwhile, the matter will be heard when little over a year will be left in the life of NAA, after it was given a two-year extension.

NAA was set up in November 2017 to ensure that companies pass on the benefits of input tax credit (ITC) and GST reduction to consumers by way of reduction in prices. It has been the experience of many countries that when GST was introduced, there was a marked increase in inflation and the prices of the commodities. This happened in spite of the availability of the tax credit right from the production stage to the final consumption, stage which should have actually reduced the final prices. This was happening because the suppliers were not passing on the commensurate benefits to the consumer, thereby indulging in illegal profiteering. NAA was constituted to check this.

A standing committee at the central level looks at complaints, which have multi-state implications, while screening committees in each state deal with local complaints. These committees either dispose of the allegations or pass them on to the Director General of anti-profiteering (DG-AP) for a detailed investigation. The DG-AP report is then considered by the NAA, which is headed by the chairman, for passing the final order.

Let us see what each side has to say in support of its arguments:

Companies' argument:

Companies have approached the court against various aspects of NAA, including its constitutional validity and the absence of methodology to compute profiteering.

Some petitions say NAA doesn’t have even one judicial member despite being a quasi-judicial body. The chairman is a bureaucrat and so is one of the two other members, while the third is the revenue officer. 

As far as the methodology is concerned, according to Section 171 of the Central Goods and Services Tax (CGST) Act, 2017, which deals with anti-profiteering, companies have to give to consumers "commensurate" reduction in prices following the rate cuts in GST or input tax credit (ITC) benefits. Rule 126 of the CGST Act merely says the authority may determine the methodology and procedure in this regard.

"The moot point is not the constitutional validity of NAA but the constitutional validity of the anti-profiteering provisions, especially in the absence of a methodology to determine the quantum of profiteering and usage of certain vague terms such as commensurate reduction in prices," said Abhishek Rastogi, partner at Khaitan & Co.

Rastogi, who is arguing a dozen of anti-profiteering writs in the Delhi high court, said while businesses are not shying away from passing the benefits of GST reduction and ITC, the dispute is generally on the quantum of profiteering.

"There have been inconsistent ratios and methods applied to reach the profiteering amount," he said.

For instance, in the case of realty firm Pyramid Infratech, the NAA had calculated the amount of profiteering using a ratio of taxable turnover of the company to the input tax credit availed.

The case related to construction of flats under the affordable housing scheme in Haryana.

The authority had directed the firm to refund or reduce Rs 8.22 crore from 2,476 buyers’ last instalment.

The NAA found that the ratio was 1:1 in the pre-GST period and 7:2 in the post-GST era. The difference between the two (6:1) is the profiteered amount and must be refunded to homebuyers or the prices of flats must be reduced to that extent.

Besides, the interest at the rate of 18 per cent a year was also to be returned to homebuyers, NAA ruled.

This quantum was protested by the company’s counsel Rastogi, who said the project was not construction-linked but time-linked. In a construction-linked project, this ratio could be relevant, but not in a time-linked one.

Challenging the methodology, he said the ratio also did not take into account the increase in the price of raw materials such as steel and cement.

In 2017, industry representatives had approached the GST Council seeking norms for calculating profiteering. However, they were told it would be difficult to come out with these norms, given the nuances for different sectors and segments in the economy.

To this, the representatives had asked the council to base the norms on sectors and segments given by the Tariff Commission. “You have not framed the norms, and you are saying that this or that company is violating the norms. This is ironical,” an expert said.

PwC partner Pratik Jain said there are many aspects which form the subject matter of these appeals under anti-profiteering, including the constitutional validity of the provisions and lack of precise methodology to determine the amount alleged to be 'profiteered'. 

"For example, whether the profiteering should be computed at the product level, portfolio level or entity level is a critical issue. Pricing is an amalgamation of complex commercial and economic considerations in addition to tax and it will be interesting to see how the court will look at the matter," Jain said.

A report on GST prepared by PwC said there is lack of clarity on the granularity required for anti-profiteering analyses being conducted -- at the aggregate company level, the product family or SKU (stock keeping unit) levels. To elaborate on this, it isn’t clear whether a company can choose not to reduce the price of a particular product (for business reasons) and instead offer a greater quantity or freebies, or reduce prices of select products, so long as the overall benefit is passed on to consumers.

For the first time, the NAA in 2018 considered an increase in grammage to pass on the benefits to the consumers. In earlier cases, it had disallowed the mechanism. However, any increase in grammage in one particular size cannot be taken into consideration for the other sizes where grammage is not increased, the NAA said.

The PwC report also said that while transitioning to the GST regime, various costs have been incurred by companies to build or modify their IT backbone. There is still no clarity on whether such costs can be taken into account or need to be absorbed while computing a revised, anti-profiteering and tax-compliant product or service rate.

It also said a perusal of the notices issued to taxpayers does not provide clear insight into the anti-profiteering mechanism, but could give rise to additional complications. For instance, if a complaint is received against a particular product, entity-related details are sought from the company. In one case, in a notice issued against a food chain store, the authorities asked for company-related details, while the complaint against it was for not reducing the price of a specific product.

Kapil Rana, founder and chairman of HostBooks said the provisions on NAA can be considered violative of Article 14 and 19 of the Constitution. "The principle of equality has been breached with the uncontrolled choice of the executive and unguided discretion, which is arbitrary in nature. The Article 19 (1) (g) is being violated because the inherent profit motive of the traders is undermined. The reasonable restrictions for interests of the general public are also not visible," he said. 

 Arguments on behalf of consumer rights:

 

CUTs secretary general Pradeep S Mehta termed the petitions by companies in the Delhi high court as unfair.

He expressed deep concern over the benefits of tax rate reduction not being passed on by dealers to consumers by way of actual reduction in the price of the goods or services supplied by them.

He said as a learning from the VAT experience, legal teeth were provided in GST law by incorporating provisions to check profiteering by businesses when GST was being rolled out in the country.

He cited a report released in 2010 by the Comptroller and Auditor General of India (CAG) to buttress his point that dealers did not pass benefits of tax reduction to consumers in the wake of implementation of state-level value added tax.

“Anti-profiteering provisions are a positive step towards protecting consumer interests and rein in unjust enrichment, so that GST does not add to inflation in the economy,” said Mehta.

The intent of the government is to curb inflationary pressure and provide relief to consumers. "It needs to be encouraged and supported by the companies in order to maintain economic balance, particularly in the pandemic ridden economy, as many consumers are without any jobs or income,” he added.

When reminded that there is no clear-cut methodology to compute profiteering, Mehta said some defects in methodology and "commensurate" reduction in prices may be subjective, but the broad processes are defined. On a case-by-case basis, the investigation has to look into specifics that are not there in broad processes.

Mehta also said many don't understand the nuances of profiteering. For instance, he said NAA noted in a particular case that a builder who was profiteering to the tune of Rs 50 crore, claimed his profit was only Rs 30 crore.

"One has to understand the distinction between profit and profiteering. Profiteering is when you are not passing the benefits of ITC and GST reduction to consumers. Profit making and profiteering are not synonymous," he said.

To the companies' arguments that prices are a function of many factors, taxes being one, Mehta said, "Prices are certainly a function of many factors. What we are saying is that what you are deriving from the lower GST rates and ITC should be passed on to the consumers by way of reduction in prices."

When asked that by the time petitions are heard in the Delhi high court in November, only a little over a year will remain in the life of NAA, Mehta said NAA should be there on a permanent basis with a proper mandate and a separate budget. 

New Delhi