In common parlance, Profiteering means making unreasonably high profits in the course of ordinary trade or business, whereas Anti-profiteering means prevent profiteering from unethical methods.
In terms of GST law, Section 171(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.
Section 171(2) of the CGST Act requires constitution of an Authority 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.
Eg:- Company A sells a product to consumers. For this, the company A pays GST say 18% or Rs 18. Now, Company A procures material from Company B. On this transaction, Company B pays a GST too, of say 12%. This means the government earns double the amount of tax for producing one good. But it doesn’t happen this way, thanks to Input Tax Credit (ITC).
|Sl. No||Pre GST||Post GST||Profit Constant & Price adjustment|
|Purchase price of Goods||10,000||10,000||10,000
|Excise duty @12.5%/[email protected]%||1,250||900(ITC)||900(ITC)|
|VAT @5.5%/[email protected]%||619(Credit)||900(ITC)||900(ITC)|
|Tax on OE (Service [email protected]%)/(GST @18%)||15||18(ITC)||18(ITC)|
|Tax on Sale @ 5.5%/18%||688||2,250||2,022.30|
|Amount received from Customer||13,188||14,750||13,257.3|
|Profiteering/Benefit passed to customers||1,265||1,265|
Cost to company(CTC)= Tax on sale-VAT/GST
Profit= Amount received from customers-Total cost-CTC
Sale price=Sale price of Post GST regime-Profiteering.
In pre GST regime, VAT credit is available, than (CTC) will be Rs.69 (Rs.688-Rs.619), Profit will be Rs.13,188-Rs.11,984- Rs.69=Rs.1,135.
As CGST & SGST credit is available, than CTC will be Rs.432 (Rs.2,250- Rs.900- Rs.900- Rs.18), Profit will be Rs.14,750- Rs.11,918- Rs.432= Rs.2400.
As per above example Company is making extra profit of Rs.1,265 (Rs.2,400- Rs.1,135).In terms of Sec 171(1) Extra profit(Benefit) should be passed on to the final customers. These can be achieved by making price adjustment and profit constant. Sale price should be adjusted to Rs.11,235 (Rs.12,500-Rs.1,265).
In case company is not able to pass on the benefit to customers, it has to deposit the amount in consumer welfare fund run by department of consumer affairs.
CGST Rules are framed for the purpose of constituting the Authorities and providing the powers, duties, procedure, etc. of the Authority.
Anti-profiteering Structural framework
Authorities for Anti-profiteering under GST law.
Procedure under Anti-profiteering
1) A. All applications from interested parties on issues of local nature shall first be examined by the State level Screening Committee.
B. If screening committee satisfied that the supplier has not passed on the benefit to the recipient by way of reduction in prices.
C. Application will be forwarded to the standing committee on Anti-profiteering with its recommendation.
2) A. If the Standing Committee is satisfied it shall refer the matter to the Directorate General of Anti-profiteering for a detailed investigation. [As per notification No.29/2018(CT) W.e.f 6th july,2018 the word “Directorate General of Safeguards” should be replaced with the words “Directorate General of Anti-profiteering”]
B. The DGAP will complete the investigation within a period of three monthsor within such extended period.
C. The reasons for the same shall be recorded in writing as allowed by the Standing Committee. And upon completion of the investigation, furnish to the Authority, a report of its findings along with the relevant records.
3) A. The National Anti-profiteering authority (NAA) consist of a chairman and 4 technical members.
B. Duties of NAA as per Rule 127 of CGST Rules 2017
i. To determine whether any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in price.
ii. To identify the registered person who has not passed on the benefit of reduction in the rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in price.
C. Orders of the NAA
As per Rule 133 of CGST Rules 2017, the Authority may order-
i. Reduction in prices.
ii. Return to the buyer, the benefit amount not passed on along with 18% interest p.a.
iii. Payment of penalty and
iv. Cancellation of registration.
D. Investigation:- The DGAP authority shall conduct investigation and collect evidence necessary to determine undue profiteering and before initiation of the investigation, issue a notice to the interested parties relating to information on the following, namely: –
i. The description of the goods or services.
ii. Summary of the statement of facts on which the allegations are based.
iii. The time limit allowed to the interested parties and other persons who may have information related to the proceedings for furnishing their reply. The evidence or information presented to the DGAP by one interested party can be made available to the other interested parties, participating in the proceedings. The evidence provided will be kept confidential and the provisions of section 11 of the Right to Information Act, 2005 (22 of 2005), shall apply mutatis mutandis to the disclosure of any information which is provided on a confidential basis.
The DGAP can seek opinion of any other agency or statutory authorities in the discharge of his duties. The DGAP or an officer authorised by him will have the power to summon any person necessary either to give evidence or to produce a document or any other thing. He will also have same powers as that of a civil court and every such inquiry will be deemed to be a judicial proceeding.
The government has set in place ‘anti-profiteering’ rules. As per Section 171 of the CGST Act, companies have to compulsorily reduce its prices to pass on the benefits of input tax credit to its consumers. And to ensure that companies follow this tax rule, the government set up a new unit known as the Directorate General of GST Intelligence (DGSTI). This unit will collect information regarding such evasion and penalise the companies.
Actions taken by department on few famous companies.
Anti-profiteering in other countries
Many countries that have adopted GST such as Singapore and Australia witnessed a spurt in inflation after implementation. Retail inflation in Australia, for instance, spurted from 1.9 per cent in the year before GST to 5.8 per cent in the year when the tax was rolled out. Initially Malaysia was able to avoid a similar surge in inflation by effectively implementing anti-profiteering rules.
Profit is essential for businesses, but Anti-profiteering in GST could land them in serious trouble. It is better to pass on the price cuts to the customers rather than risk being pulled up by the Directorate General of GST intelligence (DGSTI).