Anti-Profiteering measures are necessary during implementation of legislature such as GST to avoid the inflationary effects of higher tax rates. Though the tax rates have risen, most of the businesses will get more input tax credit than before which will ultimately lower their cost of goods sold. In absence of anti-profiteering measures, the business will prosper since the cost will decline while keeping the selling price same. However, the economy will suffer due to spurt in cost-push inflation.
Section 171 of CGST Act, 2017 states 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 by way of “commensurate reduction in prices”.
The GST Council issued Anti-Profiteering Rules 2017 (‘Rules’) on June 19, 2017. It provides for establishment of National Anti-Profiteering Authority (‘Authority’) to ensure that businesses pass on the benefits GST to consumers.
However, the Rules itself do not prescribe the methodology and procedure for determining whether there has been “commensurate reduction in prices”. Rather, the Rules empower the Authority to determine methodology and procedure for this purpose.
Since the National Anti-Profiteering Authority is itself expected to be set up by August, there is still no clarity regarding methodology to determine whether there is undue profiteering by the entity. This transitional provision has created practical problem for the businesses as it directly affects the price of the product.
Malaysian Anti-Profiteering regulations
India may follow the Malaysian Anti- Profiteering regulations which are one of the most recent Anti-Profiteering Regulations in the world. These new regulations came into force 1 January 2017 replacing the earlier regulations.
It introduced two specific formulas to determine whether there have been any unreasonably high profits. The formulas take into account the mark-up percentage or the margin percentage.
Mark-up % = (Selling price – Cost price) / Cost price
Margin % = (Selling price – Cost price) / Selling price
Its scope is limited only to certain classes of goods, which include food and beverages, and household goods.
The determination of unreasonably high profit is made by comparing the mark-up percentage or margin percentage earned during Base Period and Comparative Period (Period of investigation). In the event of an increase in either the mark-up percentage or margin percentage, the business must be able to substantiate the increase with adequate documentation and proper justification.
However, business will not be considered to be making unreasonably high profit, if the increase in the mark-up or margin percentage is caused by a reduction in the cost of goods.
Arm’s length determination – Opinion
Since there is no clear provision as yet to determine undue profiteering, businesses can also resort to the arm’s length determination as per methodology prescribe in the Income Tax Act. While the Income Tax Act prescribe the need to establish that the profits from “controlled transaction” with associated enterprises is not less than the “uncontrolled transaction”, the businesses can use the prescribed methods to establish that the “profits without taking the benefit of GST” are not more than the “profits after taking the benefit of GST”.
For example, the CUP method prescribed in IT Act can be used to compare the “price of goods” in pre-GST and post- GST era. Similarly, TNM method prescribed in IT Act can be used to compare the “profits to sales ratio” that is to prove that the bottom-line of the business has remained same in pre-GST and post- GST era.
Though there is no guarantee that use of these methods will avoid litigation, there is high probability that using scientific methods prescribed by another legislature (IT Act) and supported by robust documentation will strengthen the grounds in case of litigation.