Non reduction of price despite GST Rate reduction by supplier is Profiteering – NAA
In terms of Section 171 of the CGST Act, 2017, the suppliers of goods and services should pass on the benefit of any reduction in the rate of tax or the benefit of input tax credit to the recipients by way of commensurate reduction in prices.
The willful action of not passing on the above benefits to the recipients in the manner prescribed is known as “profiteering”. However, it was the experience of many countries that when GST was introduced there was a marked increase in inflation and the prices of the commodities. This happened in spite of the availability of the tax credit right from the production stage to the final consumption stage which should have actually reduced the final prices.
This was happening because the suppliers were not passing on the benefits to the consumer and thereby indulging in illegal profiteering. National Anti-profiteering Authority (NAA) was therefore being constituted by the Central Government to examine whether additional input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in prices to the recipients.
Let us refer to the case of Sh. Apoorve Talera (applicant) Vs Litecon Industries Pvt. Ltd. (respondent) where the issue under consideration was that the benefit of reduction in GST rates was not passed on to the recipient (applicant).
Facts of the Case:-
- The Gujarat State Screening Committee on Anti-profiteering, vide its letter had forwarded an application filed by the Applicant to the Standing Committee on Anti-profiteering, under Rule 128(2) of the CGST Rules, 2017, alleging profiteering by the Respondent in respect of “Fly Ash Blocks” supplied by the Respondent.
- The Applicant had also enclosed two invoices of “Fly Ash Blocks” supplied by the Respondent along with his application.
- The Applicant had alleged that the Respondent did not pass on the benefit of reduction in the GST rate from 12% to 5% w.e.f 01.01.2019 notified vide Notification No. 24/2018- Central Tax (Rate) dated 31.12.2018 and instead increased the unit base price.
- The Gujarat State Screening Committee on Anti-profiteering had conducted verification of the application and after having satisfied itself that the Respondent was involved in profiteering, had forwarded the application to the Standing Committee on Anti profiteering.
- The Standing Committee on Anti-profiteering had examined the aforesaid reference, in its meeting and forwarded the same to the Director General of Anti Profiteering (DGAP) for detailed investigation in terms of Rule 129 (1) of the above Rule.
- The DGAP, on receipt of the application and the supporting documents from the Standing Committee, had issued Notice under Rule 129(3) of the CGST Rules, 2017 calling upon the Respondent to reply as to whether he admitted that the benefit of reduction in the GST rate was not passed on to the recipients by way of reduction in prices
- If the same was not passed, the respondent had to determine the quantum thereof and indicate the same in his reply to the Notice as well as furnish all supporting documents.
- Vide the above mentioned notice; the Respondent was also given an opportunity to inspect the non-confidential evidence/information furnished by the Applicant, which the Respondent did not avail.
- The DGAP had also provided Applicant an opportunity to inspect the non-confidential documents/reply furnished by the Respondent which the Applicant did not avail.
The DGAP, in his Report has stated that the Respondent had filed his submissions which are summed up as follows:-
- There was an increase in the cost of each and every raw material required for the manufacture of the said “Fly Ash Blocks”, as compared to the month of December, 2019 and the increase in the cost of raw materials ranged from 0.28% to 22%.
- Out of the total percentage increase in the base price of the product on and from 01.01.2019 when compared with December, 2019, 1.73% was attributable to the increase in the cost of production as demonstrated by the cost sheet furnished by him.
- The product was made taxable @ 5% from 01.01.2019 but the inputs, capital goods and input services for the final product “Fly Ash Blocks” attracted taxable rate higher than 5% leading to accumulation of ITC.
- The Respondent has also stated that:-
- All the inputs were taxable at the rate of more than 5%, such as Soluble Oil, Cement etc
- All the input services were taxable at the rate of more than 5% such as legal services, security services, telephone/mobile/internet services and the like. Barring transportation, all the input services of the Respondent were taxable at the rate of 18%.
- All the capital goods were taxable at the rate of more than 5%. Generally, all the capital goods of Chapter 84 and 85 of the CTA, 1975 were taxable at the rate of 18%.
- As per the CBIC Circular No. 79153/2018-GST dated 12.2018, the ITC in respect of input services and capital goods was not to qualify for refund of ITC due to inverted duty structure and thus he was left with no option but to treat the excess ITC in respect of input services and capital goods over and above 5% as cost of production since the said unutilized amount would have never materialized to him as refund and would have always remained blocked and unutilized.
- Thus, partial increase in the base price of the product manufactured by him i.e. “Fly Ash Blocks” was due to blockage of the accumulated ITC pertaining to input services.
- The Applicant had not made any payment in the months of November, 2018 and December, 2018 for the goods purchased by him.
- The Applicant had made payment for the goods purchased by him in the month of September, 2018 belatedly in the month of January, 2019.
- As business policy, the Respondent was charging interest on the delayed payments at the rate of 18% per annum. Thus, the interest on delayed payment was adjusted by way of increase in the base price of the product supplied to the Applicant.
Observations of DGAP on passing of benefit of reduction in GST rates to the recipient
- The DGAP observed that the main issues for determination was whether the rate of GST on the “Fly Ash Blocks” supplied by the Respondent was reduced from 12% to 5% w.e.f. 01.01.2019 and if so, whether the benefit of such reduction in the rate of GST was passed on by the Respondent to his recipients in terms of Section 171 of the CGST Act, 2017.
- The Central Government, on the recommendation of the GST Council, had reduced the GST rate on the “Fly Ash Blocks” supplied by the Respondent from 12% to 5% w.e.f. 01.01.2019, vide Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018 and the same was not contested by the Respondent.
- The DGAP also examined Section 171 of the CGST Act, 2017 and stated that the legal requirement in the event of benefit of ITC or reduction in the rate of tax was that there must be a commensurate reduction in the prices of the goods or services.
- Such reduction could only be in terms of money, so that the final price payable by a recipient got reduced equivalent with the reduction in the tax rate or benefit of ITC.
- This was the only legally prescribed mechanism to pass on the benefit of ITC or reduction in the rate of tax to the recipients under the GST regime and there was no other method which a supplier could adopt to pass on such benefits.
Observations of the DGAP on the contention of the Respondent that the base prices were increased to offset the increase in prices of the raw materials and cost of production:-
- The DGAP submitted that this contention could not be accepted as such increase in the prices of raw materials could not have happened overnight to exactly coincide with the GST rate reduction w.e.f. 01.01.2019.
- Thus, the increase in the cost of raw materials/input services, if any, had no relevance in the context of GST rate reduction w.e.f. 01.01.2019.
- The DGAP further submitted that Section 171 of the CGST Act, 2017 did not provide any scope for adjustment of increase in the cost against the benefit of reduced tax rate and it could not be argued that the elements of cost were affected by the downward revision of the output GST rate.
- He has also argued that the direct and indirect costs, demand and supply and other expenses might be considered in determination of prices but these factors were independent of the output GST rate and the commercial factors could not change overnight on the change of GST rate.
Observations of DGAP regarding blockage of accumulated ITC due to inverted duty structure
- DGAP stated that it was seen that the ITC had three parts viz. ITC on inputs, ITC on services and ITC on capital In respect of tax on inputs, the refund of ITC was allowed in case of inverted duty structure and hence it would not matter.
- Regarding ITC on services, the DGAP has observed that the refund of ITC was not allowed but inverted duty structure before 01.01.2019 was there also and hence it would have no effect on profiteering after 01.01.2019.
- Regarding ITC on capital goods, it was seen that the Respondent had not taken any ITC on capital goods during the period under consideration.
Observations of DGAP regarding profiteering by the Respondent
- The DGAP thus stated that the Respondent did not reduce the selling price of the “Fly Ash Blocks”, when the GST rate was reduced from 12% to 5% w.e.f. 01.01.2019, vide Notification No. 24/2018 Central Tax (Rate) and hence profiteered and thus the benefit of reduction in the GST rate was not passed on to the recipients by way of commensurate reduction in the price, in terms of Section 171.
- The amount of net higher sales realization due to increase in the base prices of the impacted goods, despite the reduction in the GST rate from 12% to 5% or the profiteered amount came out to be Rs. 55,60,340.
- The DGAP has also furnished details of the computation of the profiteered in his Report.
- The DGAP has further submitted that the profiteered amount had been arrived at by comparing the average of the base prices of the “Fly Ash Blocks” sold during the period from 01.12.2018 to 31.12.2018, with the actual invoice-wise base prices of “Fly Ash Blocks” sold during the period from 01.01.2019 to 31.03.2019.
- The excess GST so collected from the recipients, was also included in the aforesaid profiteered amount as the excess price collected from the recipients also included the GST charged on the increased base prices.
Observations of the National Anti-Profiteering Authority (NAA)
- NAA carefully considered the Reports filed by the DGAP, submissions of the Respondent and other material placed on record and it was evident that rate of tax has been reduced on the above product which was admittedly being supplied by the Respondent.
- Therefore, the provisions of Section 171(1) which state 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.” squarely apply in this case and the Respondent is bound to pass on the benefit of the above tax reduction to his recipients w.e.f. 01.01.2019.
- Based on the above facts, the Respondent had contravened the provisions of Section 171 of the CGST Act, 2017 and had not passed on the benefit of reduction in the rate of tax to his recipients by equivalent reduction in the prices.
- Accordingly, the profiteered amount is determined as Rs. 55,60,340 as per the provisions of Rule 133(1) of the CGST Rules, 2017.
- The Respondent was therefore directed to reduce the prices of his products as per the provisions of Rule 133 (3)(a) of the CGST Rules, 2017, keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients.
- Since, the Applicant had stated vide his letter attached by the DGAP with his Report that he had received the disputed amount therefore, the profiteered amount in respect of the above Applicant shall not be paid to him and shall be deposited in the Consumer Welfare Funds (CWFs) as this amount cannot be retained by the Respondent.
- Accordingly, the Respondent was directed to deposit the profiteered amount of Rs. 55,60,340 along with the interest to be calculated @ 18% from the date when the above amount was collected by him from the recipients till the above amount is deposited in terms of the Rule 133(3)(b) of the CGST Rules, 2017.
- Since, rest of the recipients in this case were not identifiable, the Respondent was directed to deposit the amount of profiteering of Rs. 55,60,3401 along with interest in the CWFs of the Central and the concerned State Governments as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 in the ratio of 50:50 along with interest @ 18% till the same is deposited.
- Accordingly, an amount of Rs. 27,80,170 will be deposited in the Central CWF while the balance will be deposited in the State CWFs.
- The respondent had committed an offence under Section 171 (3A) of the CGST Act, 2017 and therefore, he was apparently liable for imposition of penalty under the provisions of the above.
- Accordingly, a Show Cause Notice was to be issued to him directing him to explain why the penalty prescribed under Section 171 (3A) of the above Act read with Rule 133 (3) (d) of the CGST Rules, 2017 should not be imposed on him.
Hence in conclusion, the suppliers of goods and services should pass on the benefit of any reduction in the rate of tax or the benefit of input tax credit to the recipients by way of commensurate reduction in prices. If the benefits of price reduction are not passed to the recipients in the manner prescribed it will be considered as “profiteering” and relevant action will be taken.