In case of GST rate reduction or availment of ITC, what you should know - Anti profiteering measure

Section 171 of the CGST Act, 2017 - Antiprofiteering measure

 

Before initiating the discussion on anti profiteering measure, one should clearly understand the meaning of anti profiteering under GST Act.


Let's take an example- Mr. A, manufacturer of Set top Box for TV, on which GST rate has been reduced by the govt. from 28% to 18%.


When GST rate was 28%


Cost involved in manufacturing of one Set top box were as follow:-


Cost of raw material - Rs. 100 + GST@ 18% = Rs. 118

Cost of Input services -Rs. 100 + GST@18% = Rs. 118

Profit margin - Rs. 50


Hence, final price to consumer = 100+100+50 = Rs. 250 + GST@28% = Rs. 320

GST payable by manufacturer = Rs. 70 (Output tax) - ITC (Rs.36) = Rs. 34/-

Hence, net profit margin = Rs. 50- Rs.34 = Rs. 16/-


When GST rate is 18%


Cost involved in manufacturing of one Set top box were as follow:-


Cost of raw material - Rs. 100 + GST@ 18% = Rs. 118

Cost of Input services -Rs. 100 + GST@18% = Rs. 118

Profit margin - Rs. 50


Hence, final price to consumer = +100+100+50 = Rs. 250 + GST@18% = Rs. 295

GST payable by manufacturer = Rs. 45 (Output tax) - ITC (Rs.36) = Rs. 9/-

Hence, net profit margin = Rs. 50- Rs. 9 = Rs. 41


Since due to reduction in GST rate, the total outflow of manufacturer due to GST got reduced from Rs. 34 to Rs. 9, hence this advantage of reduced cost and increased net profit margin (Rs. 41-16 = Rs. 25) shall be passed on to the ultimate consumer.


If such advantage has not been passed to the consumer i.e manufacturer retains such profit margin on account of reduced GST, such act is called profiteering. (Oxford dictionary meaning - the act of taking advantage of a situation in order to make a profit, usually by charging high prices for things people need).


Anti-profiteering measures have been incorporated under GST law to provide benefit of reduction in GST rates to the consumers in terms of reduced prices and not allow more profit margins to the businessmen. The suppliers of goods and services must pass on any reduction in the rate of tax or the benefit of input tax credit to consumers by way of commensurate reduction in prices.


  • Section governs Anti-profiteering in GST

Section 171 of the CGST Act, 2017 and Rules 123 to 137 of the CGST Rules deals with the provision of anti-profiteering authority under GST law


Relevant Extract of 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.


(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.


(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.


*(3A) Where the Authority referred to in sub-section (2) after holding examination as required under the said sub-section comes to the conclusion that any registered person has profiteered under sub- section (1), such person shall be liable to pay penalty equivalent to ten per cent. of the amount so profiteered:


Provided that no penalty shall be leviable if the profiteered amount is deposited within thirty days of the date of passing of the order by the Authority.

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.

* Inserted by Finance Act 2020

  • Administrative framework of the Anti-Profiteering Authority

There are 3-tier structure for the investigation and adjudication of the complaints regarding profiteering:


1. 31 State Screening Committees and Standing Committee

2. Directorate General of Anti-profiteering; and

3. National Anti-profiteering Authority;


  • Anti Profiteering Mechanism Under GST

Under GST, suppliers of goods and services must pass on any reduction in the rate of tax or the benefit of input tax credit to consumers by way of commensurate reduction in prices.


If not, effected consumers or commissioner or any other person may file an application, in the prescribed format, before the

- Standing Committee on Anti-profiteering" (if the profiteering has all-India character) or

-before the State Screening Committees (if the profiteering is of local nature).


As per Rule 128 and Rule 129 of CGST Rules, 2017:


Rule 128: Examination of application by the Standing Committee and Screening Committee.


(1) The Standing Committee shall, within a period of two months from the date of the receipt of a written application from an interested party examine the accuracy and adequacy of the evidence provided in the application to determine whether there is prima-facie evidence to support the claim of the applicant that the benefit of reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has not been passed on to the recipient by way of commensurate reduction in prices.


(2) All applications from interested party on issues of local nature shall first be examined by the State level Screening Committee and the Screening Committee shall, upon being satisfied that the supplier has contravened the provisions of section 171, forward the application with its recommendations to the Standing Committee for further action.


As per Rule 129 of CGST Rules 2017 - Initiation and conduct of proceedings.


(1) Where the Standing Committee is satisfied that there is a prima-facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, it shall refer the matter to the Director General of Anti-profiteering* for a detailed investigation.


(2) The Director General of Anti-profiteering shall conduct investigation and collect evidence necessary to determine whether the benefit of 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 prices.


*The Directorate General of Anti-profiteering (DGAP) has been created vide office order No. O5/Ad.IV/2018 issued by the Central Board of Indirect Taxes on 12.06.2018 with new functions and includes the following:


  1. Conduct of investigation to collect evidence.

  2. Responsibility for coordinating anti-profiteering work with the National Anti-profiteering Authority, the Standing Committee and the Screening Committees.

  3. The mission of this DGAP is to complete the Anti-profiteering investigations in a time-bound manner and submit its report to the National Anti-profiteering Authority within 3 months or such period as extended by the NAA in terms of Rule 129 (6) of Central Goods and Services Tax Rules, 2017.


As per Rule 133 of the CGST Rules - Order of the Authority (NAA)


(1) The Authority shall, within a period of six months from the date of the receipt of the report from the Director General of Anti-profiteering determine whether a registered person has passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices.


(2) An opportunity of hearing shall be granted to the interested parties by the Authority where any request is received in writing from such interested parties.


(2A) The Authority may seek the clarification, if any, from the Director General of Anti Profiteering on the report submitted.


Consequences if a person proved guilty


Where the Authority determines that a registered person has not passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order-


(a) reduction in prices;


(b)

Eligible person does not claim return of the amount or is not identifiable


If return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of 18% from the date of collection of the higher amount till the date of the return of such amount or recovery of the amount including interest not returned, as the case may be;


Eligible person does not claim return of the amount or is not identifiable

the deposit of an amount equivalent to fifty per cent of the amount determined under the above clause [along with interest at the rate of 18% from the date of collection of the higher amount till the date of deposit of such amount in the Central Consumer Welfare Fund constituted under section 57 and the remaining fifty per cent. of the amount in the Concerned State Consumer welfare Fund constituted under section 57 of the State Goods and Services Tax Act, 2017.


(d) imposition of penalty as specified under the Act; and


(e) cancellation of registration under the Act.


As per Rule 135 of the CGST Rules prescribes that;-


Any order passed by the Authority under these rules shall be immediately complied with by the registered person failing which action shall be initiated to recover the amount in accordance with the provisions of IGST, CGST or SGSGT/UTGST Act as the case may be.


  • Latest decision of NAA in profiteering case


In case of NAA vs Shiva parvathi theatre ( case no. 61 of 2020 dt. Sep 08,2020)


Where applicant alleged profiteering by respondent in respect of supply of services by way of admission to exhibition of cinematographic film, since respondent had not reduced selling price of admission tickets commensurately despite reduction in GST rate on said service from 28 percent to 12 percent w.e.f 1-1-2019 to 30-6-2019, respondent had denied benefit of rate reduction to his customers and thus, he had contravened provision of section 171.


To Read complete order (Click here)


#Section171 #Antiprofiteering #Analysis #GSTcaselaw

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