Passing benefit of the Input Tax Credit to the recipient by commensurate reduction in the prices is not straightforward:

One of the most subjective issues in GST has been what is meant by and how Passing on the Benefit of benefit of the Input Tax Credit to the recipient by commensurate reduction in the prices of goods or services or both has to be calculated under GST Regime.The matter has decided by National Anti-Profiteering Authority and is pending for consideration before the Delhi High Court.Lets try to analyse the provisions with relevant Judicial Rulings.
1. Section 171 of CGST Act, 2017-: What is an Anti-Profiteering Measure
Section 171(1) provides that any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Therefore, provision identifies two events wherein benefit of either of them has to be passed on to the consumer i.e.
– Any reduction in rate of tax on any supply of goods or services.
– Benefit of input tax credit.
2. What is meant by benefit of Input Tax Credit being passed on to the consumers with commensurate reduction in the prices of goods or services or both
This clause provides that the additional benefit of the Input Tax Credit should be passed on to the recipient by commensurate reduction in the prices of goods or services or both.
The clause provides that supplier cannot be benefitted by availment of Input Tax Credit at the expense of the recipient and commensurate benefit should be passed on to the recipient with appropriate reduction in the supply price of goods or services or both. Right of availment of Credit rests with the supplier only to pass on the benefit to the consumer and not for holding it in his own account. Supplier is bound to act as a pass through or an agent and actual benefit should go to the consumer.
Taking a very simple example, supposedly, under the pre-GST Regime, supplier was eligible for Input Tax Credit of Rs 100/- on a selling price of Rs 500/- of the product and Rs 50/- was forming part of the cost price. Subsequently after implementation of GST, supplier was eligible for a credit of Rs 150/-. Therefore, selling price of the product would now be Rs 450/- and tax should be charged on Rs 450/-.
The mechanics is not so simple but example has been taken just as a starting point. There are many factors which are going to impact in assessing the benefit of input tax credit. Assessing Commensurate benefit in reduction of tax rate is much simpler than assessing the commensurate benefit of Input Tax Credit.
3. Stage of Claim of Input Tax Credit to be used for quantifying the amount of benefit to be passed on to the recipient: It is the Input Tax Credit availed or Input Tax Credit utilized
The issue now arises is which stage of claim of input tax credit would be used for quantifying the benefit to be passed on to the recipient. Would it be the Input Tax Credit availed or Input Tax Credit Utilized.
Meaning of the Word ITC Availed has been clarified vide Circular No. 79/53/2018 Dated 31^st December 2018 wherein it has been clarified that Input tax credit can be said to have been availed when it is entered into the electronic credit ledger of the registered person. Under the current dispensation, this happens when the said taxable person files his/her monthly return in FORM GSTR-3B.Further Input Tax Credit is said to be utilized when the liability is set off against the input tax credit availed.
Therefore, Balance of input Tax Credit lying in the Credit Ledger is Input Tax Credit availed and when Input Tax Credit is set off against the liability, it is set to be utilized to the extent it is set off against the liability. Therefore, what we can say is
a) Excess Balance in Electronic Credit Ledger: Input Tax Credit availed but not utilized
b) Input Tax Credit used for setting off the liability: Input Tax Credit availed and utilized
c) Input Tax Credit not credited in Electronic Credit Ledger: Input Tax Credit neither availed and not utilized
Lets analyses Section 171(1) and 171(2) and see what inferences can be drawn from the same. On one hand Section 171(1) provides that benefit of input tax credit should have been passed on the recipient by way of commensurate reduction in the prices and on the other hand Section 171(2) provides for that the authority shall examine that whether benefits of the input tax credit availed have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
Thus, as can be seen that whereas Section 171(1) reveals little about the stage of claim of Input Tax Credit to be used for quantifying the amount of benefit to be passed on to the recipient. However, Section 171(2) clearly provides that the benefit of input Tax Credit availed has to be passed on to the recipients.
Therefore, on a conjoint reading of both Section 171(1) and 171(2), it can be concluded that Section 171(1) provides for the benefit of input tax credit availed should have been passed on the recipient by way of commensurate reduction in the prices and Section 171(2) provides for that the authority shall examine that whether such benefits of the input tax credit availed have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
Hence, Benefit of Input Tax Credit availed has to be passed on to buyers and not benefit of Input Tax Credit utilized. This also forms one of the most litigative issues in arriving at the benefit to be passed on to the recipient.
4. Relevant Judicial Rulings
In the matter of Shylesh Damodaran v. Landmark Automobiles (P.) Ltd. [2018] (NAA) it was held that comparison of pre-GST and post-GST invoices issued by respondent car dealer revealed that benefit of Input Tax Credit had been passed on by respondent to applicant purchaser by reduction in base price of car, respondent would not be liable for contravention of provisions of section 171.
In the matter of Crown Express Dental Lab v. Theco India (P.) Ltd. [2018] (NAA), it was held that applicant had purchased Milling machines and Lava Materials Approved Sintering Furnance from respondent which had been imported from Germany and quoted price of machine prior to implementation of GST included CST and freight, but, after implementation of GST, respondent had charged 18 per cent IGST on said quoted price but he had not reduced base price (i.e., excluded CVD & CST), since respondent had charged more than actual base price and had profiteered at expense of applicant, he had violated provisions of section 171.
In the matter of Ravi Charaya v. Hardcastle Restaurants (P.) Ltd [2018](NAA) respondent had availed ITC benefit of Rs.9.33 crores till November 2017, which was not passed on to customers.Therefore, it was held that respondent by denying benefit of ITC to its customers had resorted to profiteering in contravention of provisions of section 171.
In the matter of Vivek Gupta v. Gurukripa Developers & Infrastructures (P.) Ltd.[2019], applicants had filed complaint before Anti-Profiteering Authority stating that respondent had resorted to profiteering in respect of purchase of flat constructed by respondent in its ‘Vrindavan Yojna Project’, Lucknow, it was held that respondent had denied benefit of ITC to applicants as well as rest 64 purchases of flats in contravention of provisions of section 171 (1) and had, thus, realized more price from them than what it was entitled to charge and had also compelled them to pay more GST than what they were required to pay by issuing incorrect tax invoices and, hence, it had committed offence under section 122 (1)(i) and was liable for imposition of penalty under section 122, read with Rule 133 (3)(d) of the CGST Rules, 2017.
In the matter of Ashok Khatri v. S3 Infra Reality (P.) Ltd. [2019] (NAA) it was held that respondent engaged in business of construction of flats under affordable housing scheme had denied benefit of Input Tax Credit (ITC) to buyers of flats and realized more price from them than he was entitled to collect and also compelled them to pay more GST than that they were required to pay by issuing incorrect tax invoices, he would be liable for profiteering.
In the matter of Sukhbir Rohilla v. Pyramid Infratech (P.) Ltd [2018] (NAA) it was held that respondent builder had denied benefit of Input Tax Credit to buyers of flats being constructed by him under Affordable Housing Policy 2013 in contravention of provisions of section 171(1) and had thus realized more price from them than he was entitled to collect and had also compelled them to pay more GST than that they were required to pay by issuing incorrect tax invoices and had committed an offence under section 122(1)(i) and therefore would be liable for imposition of penalty.He was further asked to return the amount profiteered to all flat buyers.
However, Honble Delhi High Court has stayed the operation of the order vide their order Pyramid Infratech (P.) Ltd. v. Union of India [2018] (Delhi).
5. Issues wherein further clarity is required
The matter in case of benefit of Input Tax Credit availed to be passed on the buyers with commensurate reduction of prices is not as straightforward as it seems and there are many factors which are subjective in nature and pretty difficult from the point of the view of the suppliers to ascertain. Few of the issues are narrated herein below:
a) What if the Input Tax Credit availed is passed on to the Buyers but the same could not be utilized by the supplier due to any reason i.e. Output Tax Lesser than Input Tax, Supplier has to reverse the credit subsequently on account of provisions of Section 17(1)/17(2) or 16(2).
b) Actual Input Tax Credit availed can only be ascertained once the supply is complete and till then input tax credit availed is only an estimation
c) Suppliers from whom inputs or input services have been procured have in turn increased their prices therefore prices have actually been increased due to in crease in procurement of raw material
d) No specific methodology provided in the statue for arriving at benefit of Input Tax Credit to be passed on to the buyers and therefore adoption of any method therein is subjective. The same issue has been challenged before the Delhi High Court in the matter of Pyramid Infratech (P.) Ltd. v. Union of India [2018] (Delhi) wherein it has been argued that lack of clarity on anti-profiteering has led to violation of basic rights such as freedom of speech and equality.
These are only illustrative list of the issues and many more issues can crop in specific cases.
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