Why Anti-Profiteering Investigator Wants HUL To Pay Three Times More

The Directorate General of Anti-Profiteering said that Hindustan Unilever Ltd. profiteered to the extent of Rs 495 crore by not passing on the benefit of a reduced Goods and Services Tax rate to consumers, an official aware of the development told BloombergQuint. That’s more than three times the Rs 160 crore India’s largest consumer goods maker voluntarily deposited in a consumer welfare fund as the profiteered amount.

The investigating agency’s calculation is significantly higher because the fast-moving consumer goods maker passed on part of the benefit to consumers by giving additional grammage for the same price, the official said.

Why Did The Issue Come Up?

The directorate, citing the law, said in its findings that a cut in tax rate should be passed on as a “commensurate reduction in price”. The law doesn’t specify other offers that a company can provide instead of price reduction. The investigation agency called passing on the GST rate cut through extra grams for the same price as invalid, the official quoted earlier said.

What Happens Next?

The case is with the National Anti-Profiteering Authority, and it may look at three criteria while deciding whether extra grammage classifies as a benefit to customers at the time of GST rate cut, the official cited earlier said. These are:

• Passing on the benefit since the GST rate was reduced.
• Whether the extra grams offered is “commensurate” to rate cut.
• If the scheme is an ongoing business promotion activity or not—to ensure that companies offering extra grams before the GST rate cut don’t call it a benefit to customers after the tax rate is reduced.

The Company View

HUL, in its earnings press conference in October, said the directorate didn’t agree with the practice of increasing the weight of a pack instead of lowering prices to pass on the benefit of lower GST rates. “We’re explaining to them (the NAA) that it’s a standard industry practice, especially for packs priced at Rs 2, 5 or 10 each,” Srinivas Pathak, chief financial officer of HUL, had said. “We’re hopeful that they will take this into account before passing an order.”

The company said it had voluntarily deposited Rs 160 crore with the consumer welfare fund as it couldn’t reduce maximum retail price on products in the supply chain after the GST Council reduced rates in November 2017. “In the absence of set rules and guidelines on profiteering, we have gone by the spirit of the law, and we passed on the entire benefit received under GST to consumers—either through reduction in prices or through increase in grammage,” an HUL spokesperson said in an emailed statement.

The official cited earlier, however, said the company deposited Rs 121 crore in the consumer welfare fund. But the HUL spokesperson said in the statement to BloombergQuint that the company “suo moto deposited Rs 160 crore (including Rs 36 crore on behalf of our redistribution stockists) into the government’s Consumer Welfare Fund. During the entire process, we have kept the government informed of the approach and the manner that we had adopted in passing on the GST benefits to consumers.”

What The Experts Say

Krishan Arora, an indirect tax partner at Grant Thornton India, said “anti-profiteering provisions state that the benefit of GST rate cut should be passed through commensurate price reduction. “Whether passing extra quantity at the same price qualifies as the criteria is debatable.”

The applicability of GST on promotional schemes, including offering additional quantities and free gifts, is itself a subject of ambiguity in terms of the current GST provisions, said Arora.

Sumit Lunker, an indirect tax partner at PwC India, disagreed. In the absence of any prescribed method in the GST law to calculate undue profit earned, companies are free to adopt a reasonable strategy to pass the benefit of GST rate reduction based on industry practice, Lunker said. “The law indeed requires you to pass the profit by commensurate reduction in price, but nowhere it mentions that increasing the quantity for the same price does not meet the requirements of the law.”

He explained, with an example, how a 10 percent reduction in GST of a shampoo sachet that cost Rs 6 before the rate cut would be priced at Rs 5.40 after reduction. Based on industry practice, companies would prefer increasing the grammage of the shampoo than price it at Rs 5.40, he said.