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Decoding the Anti Profiteering laws 2017 for Indian small business

Last Updated on 26-Jun-2017

If you a goods seller or provider of services registered under the GST, you are required to pass on the benefit of input credit to the consumers. This is not a warning by any government but has been included in the law. So it’s not an apple that you should have it daily to keep fit but it’s the mandatory bye-pass surgery else you would face consequences that even results to cancellation of your registration.

The provisions which has been created to take these into the part of the law are called Anti-profiteering Rules 2017. Under this article we will try to provide the review of the complete rules.

A. Purpose of these rules
  • to determine whether any reduction in rate of tax on any supply of goods or services or the benefit of the input tax credit has been passed on to the recipient by way of commensurate reduction in prices
  • to identify the registered person who has not passed on the benefit of reduction in rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices.
B. Consequences

If you are a seller, who has not passed on the benefit of the reduced prices to the ultimate customers, then you would face these following consequences

  • Order from the authority for the reduction in the prices
  • Return the excess amount charged to the recipient along with the interest @ 18%,
  • Imposition of penalty and
  • Cancellation of registration under the Act.

Now let’s just take examples to understand this from different view points:-

Case 1. Mr Hoshiyaar Singh

Mr. Hoshiyaar Singh, is the trader of goods based in Delhi (Registered under the Delhi VAT Act but not under Central Excise Act), purchases goods from Big Company Private Limited.
Under the Non GST regime Suppose Mr. Hoshiyaar Singh purchases goods from Big Company private limited, say for INR 100,000 on which the Big Company charges 14% excise and 12.5% Delhi VAT. Mr. Hoshiyaar Singh, being registered under the DVAT can take the credit of DVAT charged to him but he cannot take the credit of excise duty paid hence the effective cost of purchase would be INR 114,000 (including INR 14,000 for excise). Now Mr Hoshiyaar Singh sells these goods for INR 150,000 along with DVAT 12.5%. The profit is INR 36,000 (Working are shown in the table below)
Now lets us consider the GST regime - where the goods traded by him comes under the 18% tax rate.If he still buys the goods at INR 100,000 and sells them @ INR 150,000 along with GST @ 18%. The profit in this case is INR 50,000 (Working are shown in the table below)

S.No Particulars Under Non GST Regime Under the New GST Regime
A Input (Basic Costs) 100,000 1,00,000
B Add: Excise Duty at 14% 14000
1,14,000
C Add DVAT at 12.5% 14,250
D Add: GST at 18% 18,000
E Total Input Costs (A + B + C) 1,28,250 1,18,000
F Effective Cost (A + B) 1,14,000 1,00,000
G Sales Price 1,50,000 1,50,000
H Profit (G - F) 36,000 50,000

Detailed Analysis on Anti profiteering practice followed by Mr Hoshiyaar Singh

The working in the above table shows that even after the rate of tax has been increased for Mr. Hoshiyaar Singh the profit has increased as he is able to claim more input taxes from the government. Earlier he wasn’t able to get the credit of excise duty which he can claim now, this is going to be the biggest impact from the GST. And the government also believes this , consequently they have introduces the Anti Profiteering Rules, which is quite understandably reflects that the government want the business houses to pass on the benefit to the consumers and not allow the businesses to make the profit from the switch of taxation system.

Lets explore another case

Case 2. This case is to cover up as to how the service providers are impacted.

Under Non GST Regime. Suppose in case of Mr Gupta, who is a CA runs his own practice in Mumbai , he does have his registration under service tax. Mr Gupta recently expanses his team and as such he bought 10 laptops for his team , say INR 50,000 plus VAT @ 10% (say) for each laptop. The effective cost for each laptop for Mr Gupta would be INR 55,000 since he cannot claim the input of VAT as Mr Gupta is registered under service tax and not under VAT. However, under the GST regime Mr Gupta would be able to take the credit of GST charged on the laptop (ofcourse subject to other conditions), and that would definitely reduce the cost for Mr Gupta, and the whole expectation from Mr Gupta is that the reduction in cost on account of reduction in the input cost (due to admissibility of credit) should be passed on to the buyer.

Conclusion:

I just hope I am able to explain as to from where this whole concept is coming from and also how it impacts but there are certain questions that one has to give a thought about

  • Do you really think Mr Hoshiyaar Singh or Mr Gupta would pass on the benefit to the consumer (I know what you are thinking, just laugh a bit)
  • Will the department be able to discover the facts when there would be thousands of assesses with so many businesses with each business having its own secrets.
  • Will department abuse this power to threat the business man.
  • What about the increased costs of compliances under the GST , will that be taken as a plea for not passing on the benefit to the consumer.


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About the author

Ankit Gupta

Ankit Gupta, CA (Chartered Accountant) has spent considerable time in the industry providing solutions to the business fraternity. His early career saw him working in top level CA firms and US multinationals where he polished his understanding of finance and law. An alumni of Shaheed Bhagat Singh College (Delhi University), he has since spent time working with numerous services companies, traders, retailers and manufacturers. Being a keen follower of technology, he spends considerable time exploring technology solutions for the Indian businesses. Apart from work, he loves spending time with his wife & son.