There is great dilemma in pricing of products so much so that for every overvaluation businesses are suspected of money laundering and for every undervaluation they are suspected of tax evasion. Adding to this is Section 171 of the CGST Act which reads as below:-
1) 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 by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
Explanation.— For the purposes of this section, the expression “profiteered” shall mean the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services or both
The basic idea is that the reduction in rate of tax must lead to reduction in prices. Albeit it is a noble provision but the premises on which it stands is shaky as the taxes are not the only criteria on which the prices are decided. Had it been so reduction in indirect taxes would have lowered the inflation level but it has never been the case. Secondly the provision contemplates that the only way benefit to be transferred is reduction in prices which may disrupt the fund planning of businesses.
The construction businesses are at center stage of anti-profiteering in some of the latest judicial pronouncement. The article is an attempt to summarize the methodology and crux of these rulings.
The impact of introduction of GST on ITC construction industry which can be summarized as below:-
|Particulars||Pre GST||Post GST|
|Goods||ITC of Excise and VAT not available||Full ITC available|
|Input Services||ITC of service tax available||Full ITC available|
Firstly comes the question of determining as to how the builders have benefitted from additional ITC available. The DGAP has adopted formula of comparing ratio of ITC available to turnover in pre GST & post GST era for computing profiteered amount which can be explained as below:-
Step-1: Calculate percentage of total ITC available to turnover ratio for pre GST &
Step-2: Recalibrate base price by reducing the percentage of incremental ITC
Step-3: Calculate difference between base price + taxes and recalibrated base
price + taxes
The doubts were raised on correctness of above formula as it fails to consider if the benefit of ITC got neutralized by any increase in cost of goods sold pre & post GST and therefore cannot depict whether the builders have actually pocketed tax concessions or benefits meant from customers
Surely introduction of GST resulted in better credit chain for the construction industry but along with it also came the burden of additional implementation or compliance cost of GST in terms of new IT resources, restricting of operations and consultation fees. Another aspect of that being increase in marketing or advertising cost due to slump in real estate industry post demonetization & GST regime.
The NAPA made following observation in the case of DGAP v. Elan Limited :-
“In this connection it would be appropriate to mention that every builder launches marketing campaigns and pays commission for selling his flats/houses/shops in the normal course of his business which is already built in the cost of every project and hence, the Respondent cannot claim any concession on this ground. Moreover, there is no provision under Section 171 (1) to consider the costs incurred by the Respondent while calculating the profiteered amount. Hence, the above claim of the Respondent cannot be accepted.”
Thus the said contention lost its ground for want of express provision in this regard. This seems like a serious lapse in GST law as if the authority decides computational methodology how the builders were supposed to know they had contravened Section 171 of CGST Act, 2017.
Secondly arise the question of distributing the above calculated profiteered amount qua buyer. The NAPA made following observation in the case of DGAP v. Sun city projects Private Limited:-
“The contention of the Respondent is dismissed that the excess (more than commensurate) benefit amounting to ₹ 3,91,714/- passed on by him to 716 homebuyers/ recipients be adjusted against the ‘less than commensurate’ benefit passed on to the other 20 homebuyers/recipients because the provisions of Section 171 of the CGST Act, 2017 apply to each supply which implies that each homebuyer/ recipient is entitled to the commensurate benefit due to him in respect of the residential unit supplied to him. The adjustment sought by the Respondent, if agreed, would result in depriving the aforementioned 20 homebuyers of the benefit which would be against the legislative intent of Section 171 (1) of the CGST Act, 2017 and is hence not acceptable”
This issue would not have come up if the builder has sold its entire flats at the same price. But in most cases builders have different prices for different buyers based on the mutual negotiations and therefore distribution of profiteered amount should have taken into account such discounts or lower prices charged to truly justify the builder’s case however the same was not considered.
In a free market economy buyer and sellers have liberty to make voluntary economic decisions with least or no government interventions. The anti-profiteering provision opens a window for authorities to step into the shoes of businesses and subtly aims at regulating price of goods or services irrespective of circumstances which is not in line with the fundamental right of trade or profession.
(The author is chartered accountant offering GST advisory & consultancy and can be reached on email : [email protected]. The views are strictly personal)