The article builds upon CBIC’s recent notification entrusting the job of anti-profiteering regulation on CCI and thus doing away with National Anti-profiteering Authority. The author outlines current problems in the Indian profiteering regulatory framework and the expectations from CCI in its new role.
The introduction of the Goods and Service Tax (‘GST’) brought into picture the Input Tax Credit (‘ITC’). The major goal of ITC was to minimise the cascading impact of taxes, i.e., tax on tax which raised the price of goods and services. In ITC method, the tax levied on inputs used for production of final product may be claimed as credit for payment of GST on the final product. The premise of ITC is similar to the former Value Added Tax ,i.e., the seller pays tax only on the value addition over and above the cost of inputs, thereby preventing cascading of taxes. Hence, the ITC cut greatly the input cost of the goods and services and thus enhanced the profit margins for sellers.
The report by Comptroller Auditor General of India titled ‘Implementation of Value Added Tax-Lessons for transition to Goods and Services Tax’ remarked about several cases of profiteering where sellers did not pass on the advantage of tax rate decrease & ITC to the customers after the introduction of VAT in the nation. Thus, to ensure that the benefit of GST passes to the consumers in the form of low price of goods and services, Sec 171 of the Central Goods & Service Act, 2017 (‘CGST Act’) provided that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient(consumer) by way of commensurate reduction in prices. The legislation enabled the Union Government to form a new authority or empower existing bodies for the indicated purpose. This legislative mandate action was on similar lines as Australia, Malaysia, Canada and New Zealand- other countries which have also allowed for anti-profiteering legislation under the GST framework.
Consequently, the Union Government established the National Anti-Profiteering Authority (‘NAA’) to meet the mandate of Sec 171. However, the tenure of NAA was faced with challenges surrounding computation technique of commensurate benefit to be conveyed to the consumers, subjective assessment of profiteering activities, non-standardised judgments etc.
Thus, the Central Board of Indirect Taxation via notification has done away with NAA and has put its responsibility to Competition Commission of India (CCI) with effect from December 1, 2022. This article provides an overview of the problems that plagued the NNA, which now must be addressed by CCI while addressing GST profiteering cases. The first part of this articles identifies problems with the absence of a specified objective methodology in assessing profiteering. It goes on to describes how this lacunae results in inconsistency in orders, thus rendering the existing anti-profiteering regime incompatible with a market opting for different pricing and distribution strategies. Furthermore, problems linked to equal treatment of assessees and the issue of equity with regard to the present anti-profiteering system have also been underlined. This piece then concludes by remaining optimistic about CCI timely addressing these problems to develop a robust anti-profiteering regime in India.
Lack of Methodology in Gauging Profiteering
Anti-profiteering should not be considered as a pricing control put on enterprises stopping them from regular price hikes which may be on account of past trends, increase in expenses, increased margins etc. Anti-profiteering as a regulatory effort is merely to prohibit entities to subsume the gains emanating out of ITC. The desirable end of such regulation is to enable the benefits of ITC to be transferred to customers in terms of cheaper MRP of products and services.
Section 171 of the CGST Act, 2017 provides that any decrease in tax rate or benefit of ITC is obliged to be passed on to the end customers via a commensurate reduction in prices. At present, the NAA did not establish any profit level indicator to assess if commensurate benefit of the decrease in input cost has been transferred to the consumers. This lacunae of specified computation methodology presents twin challenges; first, the decision of the regulator is based upon subjectivity rather than objectivity and secondly, such subjectivity intensifies in gravity while adjudicating matters relating to sectors distinctive in price levels and competitive dynamics than general market.
The ample manifestation of the first problem could be found in Director General of Anti-Profiteering v. Dange Enterprises wherein it was not only held that methodology adopted by NAA to compute profiteered amount was not correct but the Director General (‘DG’) had computed profiteered amount without data, i.e., the inquiry was concluded without the authority accounting for enough data.
The NAA in Director General of Anti-Profiteering v. NY Cinema LLP accepted that commensurate reduction in pricing may differ from product to product and, thus, no specific amount could be specified which a seller is obligated to pass on to consumer to avoid profiteering. Thus, no standard can be preemptively guarded against by the producers, dealers and distributors to prohibit any action by profiteering agency but they must depend on single decision and satisfaction of the agency.
This prevailing Indian paradigm is at glaring odds with the finest International Practices. The author would like to refer to two countries for better understanding of the International practice; Australia, because it is a much advanced and matured jurisdiction in GST (having implemented GST in 2000) and Malaysia, because it is a new jurisdiction implementing the GST Regime ( having implemented GST in 2015).
Australia has devised two methodological techniques to evaluate and ascertain profiteering activities; the dollar margin rule and 10% cap on price growth. The former implies that firms should not enhance the net dollar margins on their products and services as a consequence of the New Tax System reforms alone. The latter stipulates that no price shall grow by more than 10 percent.
Malaysia lays down objective criteria to assess profiteering actions. Sec 3 of the Anti-Profiteering (Mechanism to Determine Unreasonably High Profit for Goods) Regulations 2018 sets forth a criterion for profiteering on the basis of the Mark-up percentage of the goods or services.
In India, Chapter XV of the CGST Rules, 2018 deals with anti-profiteering. The guidelines do not give out any objective or quantitative standard to be followed for determination of the profiteering activities but Rule 126 of the said regulation leaves it upon discretion of NAA to develop such methodology. However, NAA did not develop any standard methodology during its tenure. Though an attempt was made by NAA in Director General of Anti-Profiteering v. L’Oreal India (P.) Ltd, wherein it laid out that the best suitable methodology for computation of profiteered amount could be comparison of average base price in pre-rate reduction period with actual transaction-wise base price after date of rate reduction. But, the agency restrained itself from providing norms and methodology for the determination of profiteered amount.
Thus, in India there is minimal information available on the approach to be employed to determine the commensurate benefit to be transmitted to the consumers. Jurisdictions as advanced as Australia or as emerging as Malaysia in GST have prescribed a specific calculation or technique for computation of profiteering amount. In the light of aforementioned concerns, it is desired that CCI adopts the practices and strategies pursued by other jurisdictions in streamlining the anti-profiteering regulation.
Lack of uniformity
The absence of a precise calculation approach has also generated a catena of judgement with contradictory outcomes based on similar factual matrices. Thus, reliance cannot be put on the earlier anti-profiteering decisions due to the discrepancy that exists. As an illustration, in Ravi Charaya v. Hardcastle Restaurants, the market conditions, escalating input costs, increased expenditure on electricity, gasoline, rent, royalties, commissions, etc. were not included for judging profiteering acts. But, in Kumar Gandharv v. KRBL Limited, the higher input costs were weighed while concluding that the profiteering activity was not committed by the respondent.
Different Pricing Strategies
It is only fair to claim that any corporation when deciding its pricing strategy is driven by market forces. The price decisions differ throughout industries, product lines, Stock Keeping Units (SKUs), company segments etc. The moot question which remains open for decision before CCI is at what profit indicators level, the anti-profiteering calculation should be done. The above situation may be understood by the following illustration. A corporation adopts an Indirect Marketing channel (the product travels via multiple distributors, wholesalers & retailers) to be able to reach its customers in a market where the price determination is due to operation of market forces. In the immediate case, the corporation has no influence over the mark-up above the cost price of the goods, i.e., ultimate selling price. Thus, in lack of defined regulations, it remains up to the decision of the authority to determine profiteering amount at whichever level of distribution it thinks proper. Further, the authorities may even penalise the corporation even if it did not have influence over ultimate pricing or profiting over the goods.
The problem was encountered in Director General of Anti-Profiteering v. J.P. & Sons (‘J.P. & Sons’) where the amount of profiteering calculated by DG in respect of a particular product had been calculated and confirmed against manufacturer for overlapping period and thus the DG was ordered to re-investigate matter about distributor’s liability. Hence, it should be acknowledged that within various product lines & distribution channels, there are certain SKUs which exist and they may exercise the control over price in commodity based markets. In a commodity based market (like the iron industry), the final price is not determined by manufacturer but by various players of the industry and market forces. The problem is clearly evident in J.P. & Sons, where lack of clear guidelines for distribution of liability between manufacturer and distributor became an issue.
Thus, the current regime fails to objectively lay crystal guidelines for the point of determination of profiteering activity and for the ascertainment of the entity on which the liability for profiteering activities needs to be imposed in markets opting for different pricing strategies, specifically based on open market operation.
The Equal Treatment
Indian Anti-profiteering system violates the test of equity when it compels only the pre-GST firm to be subject to continual watch with regard to anti-profiteering check. While post-GST goods/services may be freely exchanged without having to answer for such activity. Fine example is the judgement provided in Director General of Anti-Profiteering v. Elan Ltd , whereby real estate activity was taking place in post-GST period, it was found anti-profiteering laws could not be breached as there could be no comparison of pre-GST rate with post-GST tax rate. The judgement in Director General of Anti-Profiteering v. Nani Resorts & Flouriculture (P.) Ltd is likewise of the same consequence. As registration and approval of projects and receipt of payments had transpired during the post-GST era, there was no basis for comparison of ITC or tax rate available before or after introduction of GST; anti-profiteering regulations were not breached.
This approach met its logical end in Director General of Anti-Profiteering v. Shree Infra , where in a housing project, Phase I was completed in August 2014 i.e., much prior to implementation of GST and Phase III was yet to commence, Anti-profiteering provisions were held not applicable either to Phase-I and Phase-III of said housing project. The author contends that the judgement warrants reconsideration since the firm obtained the advantage of ITC and GST regime when initiating the Phase III of the project but the same benefit was not transmitted to the customers. Thus, in effect the stated ruling breaches the primary concept on which the NAA was founded, i.e., to convey the advantage of ITC to consumers.
Decision given in Director General of Anti-Profiteering v. Alton Buildtech India (P.) Ltd. is also of the same legal effect wherein the relevant phase of real estate project was launched after implementation of GST; the NAA held the manufacturer was not liable to pass any benefit to the consumers and was not liable for profiteering. The author again contends that if the manufacturer gains advantage of ITC, it must flow to end customers irrespective of the fact that a portion of the project was initiated under pre-GST regime.
In Federation of Hotel & Restaurant Assn. Of India v. Union of India, the Supreme Court has held that tax laws are not beyond the bailiwick of Article 14 and while analysing the claims of unfair discrimination under tax laws, what is inquired is not the phraseology used, but the direct impact of the discriminatory provisions, which are stated to be discriminatory. Thus, there is a fair expectation out of CCI’s duty as anti-profiteering authority that it must halt such discriminatory behaviour. In its new function as an anti-profiteering agency, it must savour and attain genuine purpose, i.e., the advantage of ITC as acquired by entities must transfer to the consumers irrespective if the portion of the project was finished in pre-GST regime.
The ITC framework of the GST is designed to progressively lower costs by substantially reducing the input cost for corporations. However, this goal cannot be met without effective regulatory oversight because corporations operate with the primary goal of profit maximisation. Thus, to prevent corporations from unfairly benefiting from the Goods and Services Tax’s implementation in India and ensuring that the consumers are benefited from this indirect taxation reform, a robust framework is required in India. An anti-profiteering commission is essential for supervising that ITC benefits are truly accrued to the consumers in terms of low pricing of goods and services. Having accounted for shortcomings that had impeded the road of NAA from an effective and efficient regulation, it is now upon CCI to overcome such hurdles and construct a sturdy framework.
Australia has, since the implementation of GST conferred upon Australian Competition & Consumer Commission (‘AAAC’) the obligation of policing profiteering actions of the corporations. AAAC compared both prices preceding to and subsequent to the adoption of GST, by means of specifically ordered studies of retail pricing. The Report on ACCC Price Surveys was based upon pre-GST price changes and post-GST Price Changes. The reports were the foundation of analytical approach created by AAAC for calculation of the profiteering amount.
It is strongly hoped that CCI adopts a realistic approach of the profiteering regulation based upon objectivity not subjectivity. NAA has also observed in Director General of Anti-Profiteering v. NY Cinema LLP that Computation of comparable decrease in pricing is merely a mathematical activity but fell short in creating such computation technique. It is to be seen if CCI adopts a logical method in dealing with profiteering activities which will be homogenous in effect and dependable as precedent.
The case of Builders Association of India v. Cement Manufacturers‘ provides a powerful indicator of what CCI’s reign as anti-profiteering agency would be. In the current instance, the regulator directed against advancing entities’ interests but guarded the promotion of individual interests. Thus, the end of NAA is a natural conclusion to India’s catastrophe of ambiguous anti-profiteering regulation. The reign of CII should attempt to make India’s profiteering regulation a clear, transparent and rule based one.
The author is an undergraduate student at the Hidayatullah National Law University, Raipur.
Categories: Corporate Law, Legislation and Government Policy