Before GST had been introduced in India, multiple tax laws had been abolished. As a result, input credits were not available to most taxpayers and came as a cost to companies. However, after the introduction of the GST regime, Indian businesses were able to claim the full input credit, lowering the overall cost.
The legislation prescribed that any benefit arising out of change in tax rate and incremental tax credit after the introduction of GST would need to be passed on to the consumers.
“The general feeling in the industry is that this provision is too arbitrary and harsh, and leads to unnecessary litigation,” said an indirect tax director at a multinational manufacturing conglomerate.
The law does not provide a specific methodology as to how to calculate the benefit from rate changes, or whether the benefit should be considered at the broader company level or for each individual product.
Therefore, many companies have been scrutinised because of this controversial provision, which also has no minimum threshold to apply this provision and anyone can file a complaint against the companies even if the value of products or services are negligible compared to the companies activities.
Most recently, Procter & Gamble (P&G) was fined INR 2.41 billion ($32.7 million) for alleged profiteering. Some of the other major companies who have faced similar investigations are Hindustan Unilever, McDonald’s, Starbucks, Phillips, Whirlpool, Samsonite, Reckitt Benckiser, Samsung, Nestle, etc.
“Anti-profiteering claims have been made on many Indian multinational companies without realising the implications or the model pricing regulations, which result in such claims as there is no laid down benchmarks to analyse and make such claims,” said one CFO at a technology and engineering company.
One head of tax at an IT service provideragreed that the computation of the benefit was not an easy task but noted that companies cannot “wash their hands with this reason.”
“Thus I am in agreement with the government where they are taking action against companies who are not passing the benefit to the customer,” they added.
P&G profiteering case
Three Procter & Gamble subsidiaries have been ordered to repay a hefty fine after they were found guilty of profiting from India’s GST rate changes.
The National Anti-profiteering Authority (NAA) found that Procter & Gamble Home Products (PGHP), Procter & Gamble Hygiene and Healthcare (PGHH) and Gillette India Limited (GIL) had not passed on tax reduction benefits to end consumers from the reduction in GST rate, as required by the law.
According to the NAA’s November 23 decision, PGHP owes INR 1.8 billion, PGHH will have to pay back INR 20 million, while GIL has a bill of almost INR 580 million. The companies will also have to reduce the prices of their products.
The NAA claimed that the company was not passing on the reduction in GST rate from 28% to 18% from November 2017. It also noted that P&G hiked the prices of 1,383 products after the reduction in tax applicable on these products was announced.
"Respondents have denied the benefit of rate reduction to the buyers of their SKU (Stock Keeping Units) in contravention of the provisions of section 171 (1) of CGST Act, 2017 and they have resorted to profiteering," the NAA said.
However, these companies have reportedly denied any wrongdoing and are reviewing their legal options. A possible lengthy tax dispute could be on the horizon in India for another multinational group.
Business may have to strengthen their positions with additional documentation and reasoning to avoid attack from anti-profiteering. Yet the key issue remains the calculation and methodology surrounding the benefit to end consumers. Taxpayers need direction from the government to prevent unnecessary and costly disputes.
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