The GST Legislation has incorporated an Anti-Profiteering clause (‘APC’) under Section 171 of Central Goods and Services Tax Act, 2017 (‘CGST Act’). The basic idea behind such clause is to keep a check on the Inflation (if any) arising out of the introduction of GST in India. The subject has been a matter of debate amongst various forums. More than 7 months have elapsed since the introduction of GST, the ideal scenario would have been one where the benefits to off-set GST be passed on the consumer since day one i.e. the very moment Mr. Prime Minister launched the GST (how can somebody launch a tax?)
While, not entirely an Anti-Profiteering topic, an attempt has been made out by this article as to where we stand after 7 months and what’s the understanding amongst multiple taxpayers who were required to comply with Anti Profiteering or at least determine its application on their business.
Recently while one FMCG giant HUL declared to pass on the funds to the tune of some crores, another competing player P&G increased the price of their bestselling shampoo by INR 1 per piece in the garb of increased quantity of 20% (instead of pro-rata 33%), making me wonder what role APC player in such increase? While I had no audacity to find the relevant figures of these private sector giants, Right to Information Act, 2005 (‘RTI’) provided some leeway in getting at least some relevant figures to do a study at my own, because surely nobody supplied a full-fledged copy of APC study.
A sum of 40 RTIs were filed before multiple Central Public Authorities from various sectors, many of them replied very gently and very promptly, some had to be shown the doors of Appellate Authority (a special thanks to Lexisnexis© for their brilliant commentary on RTI Act). Through succeeding paragraphs, an attempt has been made to find out the perception of APC amongst various organization, some shocking, some really admirable and some literally lamenting the harshness of GST system as whole.
1. Confidentiality associated with APC
There is an inherent limitation under APC. While it swiftly urges the taxpayers to pass on the specified benefits, it has no mechanism whatsoever for disclosure of the same. While there has been extraneous amount of discussion from experts over illegality of APC from point of view of (1) Excessive Delegation (2) Article 19 – right to do business (3) Absence of policy framework with the very legislative authority etc., I wonder if there is any jurisprudence which can impose absence of transparency/ disclosure as a tool for proving illegality? Within the limited knowledge in the upper most party of my body, I understand that transparency is a thing in to keep in mind in Contract and Arbitration jurisprudence, but in taxation, I’m again at the mercy of the readers.
Coming back to the one of the reply given by a “Maharatna” PSU, a brilliant answer came out. The answer was a combination of two questions (1) whether any study has been conducted over APC and (2) please provide a copy, if yes;
“Yes, an internal study has been conducted, but the same cannot be shared because of the confidentiality exemption under RTI Section 8”
As rightly worded, by brilliant justice of India, RTI cannot be a tool make an officer work (for real). The reply is finem very fine, considering RTI is an RTI and if APC information has to be extracted through RTI, it has to be within the scope of RTI Act. An understated problem with APC is the lack of any provision which mandates a defendant to disclose compliance of it. Taking that funds on a large scale to the extent of Macro Inflation are involved in the APC implementation, the lack of disclosure makes the clause absurd.
The situation could be very grave in Monopolistic sectors such as Railways, (the AC/ Tier I tickets), if Railways on its own doesn’t pass on the benefits, how is one supposed to check the same? Given that that not all fares are controlled by the government, how certain one is that prices would automatically comply with the APC. Moreover, even the government controlled pricing is largely influenced by budgetary factors, it’s not know if APC will be factored in. The moral therefore is, instead of just type-writing the clause why not put in disclosure requirements therein, to implement the same in spirit.
Caution: Railways is just an example, no RTI was filed before Railways whatsoever.
2. Economical Tilt
It seems as if the APC has been given the least attention by the Ministry of Law and Justice, besides the lack of debate in Parliament also grieved the situation. There is big gap between language of APC and the spirit of APC. Ideally, the need of APC is lesser in Market economies, Australia a key source of APC is largely a free economy, at lease freer than India. Per, a Wikipedia document, 58.1% of Indian population lives under $3.10 a day, while in Australia, the number is zero. Poverty plays a big role in the economical tilt of India, sectors involving basic necessities are largely under the control of the government. In the context, in a mixed (like India) economy, the need of APC is lesser than that in a free economy, because the input benefits will have marginal consideration while deciding the price in Price Distribution System (PDS). Can one ask Fair price shops (FPS) to moderate the prices, FPS are a laughing stock, they cannot event moderate their stock, speaking of moderating the prices.
So, if APC can work in a regulated market of the free economy, it doesn’t seem so from the response of another PSU on a question of existence of APC Study Report
I wonder, what should I take from Not applicable, it is the provision not applicable or the report not applicable or GST not applicable or what? From the response of some similar regulated PSUs, I can only interpolate that, the APC is not applicable on the basis of regulation of prices by the Central Government. That’s another default of the APC of Section 171 ibid, an explanation should’ve been carved out in the APC for the regulated sectors while drafting the same, if the prices were regulated with regard to multiple other factors in such sectors.
3. Overseas Market
Does APC has any implication on the prices charged for export supplies? Take an example, an exporter of goods exported goods at 100 during FY 2017-18, in next year he has determined an approximate amount that should have been reduced from the supplies of goods due to APC. There is no substantive change in the foreign market to sought a decrease in prices by the Foreign Exporter, in such case, should a supplier decreases the prices just to comply with APC?
If he decides to do so religiously, the problem will arise while dealing with other conditions of Foreign Market. There is substantive decrease in the prices of iron and steel at the end of the erstwhile Non Excisable trading community, because a wide pool of Excise duty credit has been availed by them in their TRAN-1, the situation can be horror if the trader exports steel flanges to USA, USA was in news recently for probing dumping of steel flanges form India.
The problem is not limited to anti-dumping duties on exports, for imports APC is a double edged sword. While GST per se a killer blow to make in India because of its “no tax exemption policy”, APC worsen the idea of Make in India.
Take another case of Import substitution by the Mega Power Projects, under APC if they source from India, the domestic suppliers will be able to offer cheaper prices as compare to Foreign exporters, to the tune of passed on benefits on account of APC, as only former suppliers can. The RTI to an Exim dominant business PSU yielded following response;
“Benefits not accrued for imported goods”
4. Costs have surpassed Benefits
This was probably one of a highlight of the research. A leading (not really) PSU Bank provided following response;
……….it has been observed that Bank revenue has, in fact, been adversely impacted by GST Implementation due to following factors;
i) Increase in compliance cost due to introduction of concept of distinct persons.
ii) Cost of changes into software which runs into crores of rupees.
iii) Payment of GST on procurement from unregistered dealers, considering that large number of branches are located in rural and semi urban areas
iv) Restrictions imposed under sector 17(5) for claiming input tax credit, which was not the case earlier. Thus, there is substantial increase in manpower cost and compliance cost
Wonder who was writing the response, but he clearly wanted to word out what’s wrong with GST Legislation as a whole. No regard whatsoever was given on the costs involved in diversified sectors for implementation of GST. A Bank already in red, has to suffer several crores in implementation of software, that too on the bank of huge exposure of NPAs on the sector. An interesting point was raised by a brilliant man on the TIOL – Intoxicating on Youtube (can’t remember the episode). The man went on with something like this, “how a CFO would explain to the Board, as why did he expended several crores on the *certain* GSP services, when the services were offered for free by GSTN portal”, how much poor a man can be in such situation. Another go by point is the Reverse Charge compliance qua unregistered suppliers. Absolute retarded provision, considering again a PAN India level software change for the Bank.
The RTI response highlights the flip side of APC, in as much as although there is APC for benefits, there is no recovery clause for losses. Can one argue, that although there is profiteering on one front, but it could be justified on other fronts where there are losses.
Rather, the fit question will be, should the prices be kept constant and maintain an entity level compliance to APC or should prices be tinkered on micro scale to comply at regional/ SKU level. The Malaysian government while incorporating APC in their legislation had indicated for a net profit margin based compliance, could the suit be followed by the Indian dignitaries as well?
All the time, before writing this section I held a firm view that suitable guidelines should have been provided for complying with the passing on benefits thing, but just at the time of writing this paragraph something came to my mind which justifies non publishing of the guidelines. The fundamental intent of APC is to stop inflation, but if a defined binding set of guidelines are issued, what chances are that they won’t be used by the business at their own volition. Furthermore, one formula might work for a particular sector, but could be disastrous in the other sector.
5. Not for profit organization
There was a surprising, shocking response by an organization. I personally felt ashamed of the reply because the reply comes from a place which at the advent of GST glorified themselves with GST to such an extent as if the GST law is passed by them than the Parliament or Legislatures. A responses on the question as to whether APC study has been conducted or not, is as follows;
‘No, as ******* is a “not for profit” organization’
I had to use single inverted commas, because the double ones were used by the organization providing the reply. There is a good saying, “speak truth or don’t”, while the response of “No” drastically undermine the position of organization, the following words could very well destroy the repute given the reasoning provided.
What on earth exempts “not for profit” organization from APC. Does that mean all Section 12A (of Income Tax Act) organizations are exempted from APC? The Finance Minister of Uganda would puke at such reasoning. Horrendous, I basically have nothing good to write in the section, and addition of words would merely undermine this whole article.
6. Study not done
There is an interesting story behind one unholy RTI reply. The CPIO could be said to be acted smartly, but at the end of the day, it also undermines the credibility of the organization. The organization of such stature basically refused to do anything on APC, this situation speaks volumes when you scan the Annual Report of the organization. On a decent look at the financials of FY 2016-17, the organization had expenses to the tune of 20 crores which can easily be identified to yield additional input tax credit, given that the organization was not charging services tax on their revenue, but are charging GST @18% on all of their revenues. There is not much to highlight from the RTI response, but for the sake of continuity, the response was as below;
“ ********** has not done any Cost Benefit analysis”
It’s a gut feeling that despite an apparent benefit of 20 * 18% – 3.6 crores, no customer of the organization is going to report non-compliance to APC to NAPA or State Level Committee.
Another fault in the APC can be seen here, the rules notified thereunder calls for an application by a person to examine if there has been any circumstance of profiteering, meaning thereby, and the authority has no sou moto power to examine any instance of profiteering by the organizations.
There is another hidden embargo, which hinders the profiteering in a supply chain. Consider this, the post GST prices of a Car has profiteering in it, but Car is brought into market after multiple-manufacturing and distribution channels. So if a person wishes to be compensated from an OEM Car manufacturer, he has to go multiple steps below OEM level, because an OEM can easily say that it has passed on all the benefits that have been accrued to him, but it can’t be held for the profiteering of Tier 1 manufacturers and the distributers of Cars.
Had, the rules specified a determination of profiteering by the authority on the supply chain basis, the true object of Inflation control would have been better achieved, but all in all, the authority just has to take care of a plaint, promoting red tape than the spirit.
7. Benefits passed on
A quite a good-cum-indirect responses came out from another giant PSU when asked about the APC study. Instead of offering any comments on the conduct of APC study, a positive response was provided as follows;
“………..and any consequential impact due to GST Implementation has been suitably incorporated in pricing. Details of which……… are of commercial confidence”
A good extent of similar responses were received where the organizations answered that benefits were in fact there and have been suitably passed on. Anything deeper than that answer was refused citing the exemption clause of RTI Act. While, it would be a little hypocritical to say here that if these organization contend that benefits have been passed on, the modus operandi of passing on such benefits will always rest in dark.
In regulated environment like cooking gas, apart from APC, there are other factors which influence the prices for e.g. Subsidies.
While Domestic LPG is under the banner of GST, at the same time its prices are highly subsidized by the DBTL (PAHAL) Scheme, 2014, the prices therefore offered to domestic buyers is inter-linked with the subsidy from the Government. The question therefore is, will the benefits of Domestic LPG will be at the mercy of subsidy or subsidy will operate independent of APC.
Consider this, the cooking gas is sold at Market price of ‘M’, but the subsidized prices are ‘H’, so subsidy comes at (M-H) making the final price always at ‘H’. Now if benefits of ‘B’ are derived from Domestic LPG, would the prices offered be ‘M-H-B’ or will they still be ‘M-H’, and subsidy of government will instead subsume the benefit of B. The subsidy cannot be a singular amongst numerous market forces that influences the prices, so even if someone pretends that benefits have been passed on, in the absence of regulations of APC, bliss compliance will always be a farce.
8. Lack of information
The APC rules places onus upon a plaintiff to show that profiteering has had a negative impact on him, however almost all the organization that provided any information on the APC, they all firmly refused any sort of statistics or figures which can act as an information for filing an application before the authority. The organizations cannot be blamed for failing to providing information. RTI Act has its own sets of restrictions and GST Act doesn’t provide for any mechanism for seeking information for filing a plaint thereof.
So the plaintiff is basically handicapped.
The structure of APC plaints misguided, absurd and subject to massive abuse.
The intent of this article is not to bring the public authorities on the scanner of compliance, but to highlight the faults in APC structure. The overall experience led to a conclusion that organization are in dark on the complications of APC. The legal sanctity is bound to be challenged in a writ on multiple grounds, but it seems that the government is all prepared to fight against. RTI is brilliant, but has no match when it comes to confidentiality rock. At the bottom most level, the expectation from a consumer perspective was disclosure and reporting compliance from the organizations vis-à-vis APC, instead of being forced to be dragged before the DG (Safeguard). Still though, one has to keep hope.
(Author can be reached at firstname.lastname@example.org)