The GST anti-profiteering watchdog, National Anti-profiteering Authority (NAA) slapped heavy penalty on consumer goods maker Hindustan Unilever Ltd (HUL) has allegedly profiteered to the extent of ₹383 crore after the large scale goods and services tax (GST) rate cut last November.
The National Anti-Profiteering Authority has held the country’s largest fast moving consumer goods company, Hindustan Unilever Ltd, to have violated the provisions. Not only that, it has ordered further investigations into subsequent time periods, and also asked for a penalty to be levied after issuing a show-cause notice. This has ramifications not only for the company, whose shares were down in early trading on Wednesday, but also for the industry.
Briefly, the anti-profiteering provisions say that the benefit of any tax reductions or of input tax credit must be passed on to the consumer. It was meant to showcase the GST regime as one that benefited the consumer through lower prices.
HUL drops over 2% after being fined for GST profiteering
But the rules for determining how benefits should be passed are not laid out. That leads to scope for interpretation, and HUL’s interpretation has not been accepted by the NAA.
In HUL’s case, this pertains to the reduction in taxes on home and personal care products from 28% to 18% in November 2017. HUL took time to pass on the price cuts, as its goods were already in the market at the distributors’ or on store shelves. It also passed tax cuts to consumers as higher volumes at the same price. HUL disclosed its inability to cut prices immediately and had even voluntarily calculated and deposited the additional amounts it collected with the government. It also advertised the changes in the grammage benefits to consumers.
But the NAA received complaints of profiteering against HUL and ordered an investigation, to be conducted by The Director General Anti-Profiteering (DGAP). The NAA considered HUL’s submissions and the DGAP report before giving its ruling. Some of HUL’s submissions were accepted and certain amounts were reduced from the total amount determined under profiteering.
But HUL was found to have profiteered by an amount of Rs 455.9 crore, and after considering HUL’s submissions (such as grammage increase), it has to pay Rs 383.4 crore. Since it has already paid Rs 160.2 crore, it has to remit Rs 223.2 crore to the consumer welfare funds of the centre and state. This investigation was for a period between 15.11.2017 to 28.02.2018.
The full ruling can be read here. Do note that HUL can appeal against this order. The interpretations by NAA could change if subsequent appeals come up with different conclusions. The case is also specific to HUL. Still, the ruling provides some insight into how the NAA could consider cases of anti-profiteering against FMCG companies.
What implications does this have for HUL and the FMCG industry at large?
The NAA has said that the moment the tax is cut (or input tax credit increases) the benefit has to be passed on without any delay. There is no scope for any delay whatsoever.
In HUL’s case, the NAA admitted its claim of having passed benefits through weightage increase but disallowed some amounts. It also clarified that giving higher volumes was not an acceptable way of passing on the tax benefit. It allowed it this time, since the anti-profiteering provisions were new. This means volume increase is unacceptable as a means of passing on lower taxes.
This means that for every day that the price remains unchanged a company has fallen foul of the law. If a company can’t cut prices, it must calculate the benefit and immediately deposit it in the centre and respective state’s consumer welfare funds, says the ruling.
The NAA order has asked HUL to commensurately reduce prices now. The impact of this is not certain at this point. Given the passage of time, prices should already reflect tax savings.
However, there is some disconcerting news. The DGAP has been asked to conduct another investigation, to determine if tax reductions have been passed on for all products. This investigation is subsequent to the period to which this case pertained-- 15 November to 28 February. What these investigations find will determine if there are any additional amounts levied on HUL. This could cause some uncertainty.
The NAA has also said that since profiteering has been determined, it has asked for a notice to be issued to HUL asking why penal provisions should not be invoked. This could mean that the amount to be paid out by HUL could increase, once the penalty is determined.
All FMCG companies would have interpreted the provisions based on their understanding and legal advice. All those interpretations are open to scrutiny. This leaves a sword hanging over their heads for some time at least. This is likely to be a question investors will query managements in their next conference call.
Since GST rates have stabilised now, is this a thing of the past? Not necessarily. Remember that the government is continuously revising rates, the latest iteration was done last week. The Finance Minister has even talked about a standard rate, where goods in the 12% and 18% rate converge to a single rate. Most FMCG goods fall in this range. When rates are cut, companies will have to cut prices immediately. They need to figure a way to do that immediately.
The government’s intentions may be that consumers should benefit from rate cuts but the anti-profiteering provisions are a harsh weapon to deploy. Companies have to evaluate the net savings that they have and also consider ongoing changes in the business environment while making price changes.
For instance, the government’s vigil on prices has meant that FMCG companies have gone slow in hiking prices even in products where input costs increased. Evidently they don't want to attract unwanted attention. That’s not what you want to see in a free market.
If a particular market’s structure was giving a company pricing power that could be attributed to its large market share, then that’s a matter for the competition authority to investigate. Even earlier, a view has been expressed that with a competition authority in place, the need for an anti-profiteering authority is debatable. HUL’s case is likely to reignite that debate.