Anti-profiteering: Follow the non-existent rules

The National Anti-Profiteering Authority (NAA) is super-busy these days. The authority, which is supposed to ensure that India Inc does not make unfair gains by charging high prices from consumers in the name of the goods and services tax (GST), is apparently flooded with complaints against many companies that have not passed on the November reduction in GST rates (from 28 per cent to 18 per cent) for most fast moving consumer goods (FMCG) and consumer durable products.

The authority is obviously taking its job seriously and has already issued notices to many companies, including some big names in the FMCG and consumer durables sectors. Hindustan Unilever is one of them. Last week, the Directorate General of Anti-Profiteering (DGAP) alleged that the company profiteered Rs 4.95 billion by not passing on the benefits of reduced GST rates. NAA will take a final view on this as well as other cases.

No one can quarrel with the basic principle of the anti-profiteering provision: The benefit of reduction in prices and/or benefit of input tax credit has to be passed on to the consumer. But the problem that India Inc faces is how to comply with the anti-profiteering rules. That’s because no rule exists.

Rule 126 of the Central Goods and Services Tax Rules says, “The authority may determine the methodology and procedure of commensurate reduction in prices…” Till date, however, the NAA has not prescribed any rule or procedure to determine what the GST law means by “commensurate reduction in prices.”  In the absence of any rule, the confusion gets compounded.

It’s not clear, for example, at what level of granularity should the benefits be passed on — should it be at a product level or at a stock keeping unit level or at a company level? Considering the complexity of the supply chain, and the short time frame for transition, it would be unreasonable to expect that on each pack, the same benefit is passed on. In some cases, it could be more while in others, it could be less.

Then there are the huge practical problems of execution. Under the current practice, the clock to comply with the anti-profiteering provision starts ticking as soon as the rate cuts are brought in by way of a notification. This is absurd. Any large FMCG manufacturer would typically have products and packs that run into thousands. To implement this price change across so many packs would typically take three to four months. The GST rate change involved significant complexities in price, format and grammage in the FMCG sector considering the sheer number of products and price diversity. The industry has to print price and grammage on every pack unlike many other industries.

In case of small packs, it’s practically impossible to reduce price corresponding to the GST rate reduction. For example, Take a Rs 3 shampoo sachet. If one reduces the price as per the GST rate reduction, the price point will be Rs 2.73. In such a case, the accepted industry practice is to retain the price point but give more quantity – which is effectively a price reduction for the consumer.

In the absence of clear guidelines or rules, the well-established FMCG practice of grammage increase was implemented by most manufacturers to pass on benefits to consumers. However, for some strange reasons, the DGAP has refused to consider grammage increase as price reduction. A higher quantity should be the same as reducing the price of a product as ultimately, the consumer is getting benefited, which is the intention of the law. Another strategy adopted by many companies is passing on the anti-profiteering benefit through promotional schemes. But it’s not clear whether these alternate mechanisms are permissible.

There are more absurdities. The government had allowed the industry to sticker the product so that the new prices could be implemented quickly. However, in reality, this option was not practical as it would be easy for anyone to peel off the sticker. Moreover, considering the sheer volume of FMCG packs at different stages such as factory, distributor, wholesaler and retailer, the exercise would have been impossible.

The lack of rules has created another complication — absence of specific time limit with respect to operation of the anti-profiteering provision makes it unclear for the industry as to how long the specified benefits need to be passed on, especially in situations where their overall cost may have increased due to various factors. For example, in the current inflationary scenario, how long can manufacturers hold the prices? What happens if a company increases prices because of rising input costs, and a consumer complains to the NAA? Under the current practice, NAA can ask any company to explain the reasons for the price increase and demand detailed documents to justify the action.

This is nothing but price control. What does it do to the so-called ease of doing business?