Absence of guidelines for calculating profiteered amount irks India Inc

The industry’s fears over lack of guidelines on calculating profiteering under the goods and services tax (GST) regime are coming to the fore. Real estate developer Pyramid Infratech has dragged the National Anti-profiteering Authority (NAA) to court over this, while Hindustan Unilever (HUL) is planning to follow suit.
 
The moot issue is interpretation of “commensurate” reduction in prices that the companies have to give to consumers following the rate cuts in GST or the input tax credit benefits, according to Section 171 of the Central Goods and Services Tax (CGST) Act, 2017.  The section deals with anti-profiteering measures.
 
“Commensurate reduction of prices may not be equal to the aggregate reduction of tax rates and enhanced credits,” said Abhishek Rastogi, partner, Khaitan & Co, who is counsel of Pyramid Infratech in the Delhi High Court. Rule 126 of the CGST Act merely says the authority may determine the methodology and procedure in this regard.
 
Last year, 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. In the case of HUL, the fast-moving consumer goods major has deposited Rs 1.6 billion in the central consumer welfare fund, according to calculations made by it.

 
But, the authority said it had profiteered Rs 5.35 billion and arrived at the figure of Rs 3.83 billion after deductions, including grammage, demanded by the company.  The charge against the company was that it did not reduce the maximum retail price (MRP) of its products after the GST rate cuts with effect from November 15, 2017. In fact, it was alleged it had increased the basic prices of products so that the MRPs remained the same.
 
An expert said Brent crude prices had been rising, while the rupee was depreciating after the GST rates were further slashed recently.
 
For products manufactured by HUL such as shampoos, body washes, and soaps, petroleum derivatives are used as inputs. The company, the expert said, buys these derivatives in the overseas market, which saw a huge rise in prices. If the company has not slashed the MRP, it does not mean it has profiteered. One has to see its input prices as well, he argued.
 
Abhishek Jain, partner, EY said, “In the absence of detailed guidelines on computation of benefits under the anti-profiteering provisions, industries had adopted positions which they felt were correct and reasonable. The NAA, on some of the issues, has taken a view divergent from the industry view, which has put industries in a spot.”
 
For the first time, the NAA considered an increase in grammage to pass on the benefits to the consumers. In earlier cases, it had disallowed those. However, any extra increase in grammage in one particular size, compared to the profiteered amount, cannot be taken for consideration for the other sizes, where grammage is not increased, the NAA said. M S Mani, partner, Deloitte, said, “Certain principles governing anti-profiteering have been laid down for the first time in the recent decision. If these principles had been announced at the time of the GST roll-out, it would have been easier for businesses to comply with the requirements.”
 
In the case of Pyramid Infratech, the NAA had calculated the amount of profiteering through 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 company to refund or reduce Rs 82.2 million 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. As such, the difference between the two - 6:1 - is the profiteered amount and must be refunded to homebuyers or the prices of flats be reduced.
 
Besides, the interest at the rate of 18 per cent per annum was also to be returned to homebuyers, the 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 increased prices of raw materials such as steel and cement.
 
Bone of Contention
 

• Moot cause: Interpretation of ‘commensurate’ reduction in prices companies have to give to the consumers following the GST rate cuts or input tax credit benefits, according to the section 171 of the CGST Act
• Rule 126 of CGST Act merely says the authority may determine the methodology and procedure in this regard
• Last year, the GST Council had told the industry representatives that it would be difficult to come out with norms for calculating profiteering, since there are different nuances for different sectors of the economy
• To this, the representatives had asked the Council to base the norms on sectors and segments given by the Tariff Commission. However, the norms have not yet come in