Anti-profiteering Authority sends notices to HUL, P&G and other FMCG Cos

MUMBAI: The National Anti-profiteering Authority (NAA) has issued notices to fast-moving consumer goods (FMCG) companies including Hindustan Unilever, Nestle and Procter & Gamble, triggering a debate over how much flexibility they get in setting prices when tax rates change.

This time, companies that partially absorbed higher taxes when the Goods and Service Tax (GST) was introduced in July 2017 are saying they should get some leeway not to reduce prices when tax rates are slashed. Many such companies are being questioned by the anti-profiteering authorities.

The tax rate on most FMCG products was about 15% when GST of 28% was introduced on them, an increase that was not fully passed on to customers. Subsequently, GST on products including shampoos, cosmetics and groceries was slashed to 18% in November that same year.

The NAA is taking prices for the July-October period of 2017 as the base to see whether the benefits of a lower rate have been passed on to customers. Experts said the authority is considering only one aspect of costing, which is causing problems.

“The authorities should take into consideration all factors impacting prices, including industry-specific nuances, instead of just carrying out a mechanical comparison of prices pre- and post-rate change,” said Rohit Jain, a partner at Economic Laws Practice, a law firm. “Many companies that had absorbed the tax burden on implementation of GST between July and October are now more at a loss as they are being asked to further reduce 10% without considering what was absorbed.”

Many firms say the NAA must take a product’s earnings as the benchmark to determine profiteering.

While HUL, Nestle and P&G are being questioned on why they did not pass on GST benefits on their products, other companies are also being investigated, industry experts said. In most cases, the probes are into small package products like shampoo sachets.

Industry experts said there is a disconnect between companies and the tax authorities. Most companies do not take pricing decisions merely based on taxes – they also take market segmentation, demand and price elasticity into consideration.

“Anti-profiteering regulation does not envisage a situation where first incremental tax incidence is absorbed by businesses and accordingly full reduction in tax is not passed on later,” said Pratik Jain, partner and leader, indirect tax, at PwC India. “Literal interpretation of the law suggests that businesses have to pass on the reduction, irrespective of any prior pricing decisions.”

An HUL spokesperson said that its “position has consistently been that certain methodology has to be determined before cases of alleged profiteering can be adjudicated. This is also a requirement under the anti-profiteering rules.”

As per some, it may be up to courts to provide clarity on the matter. P&G said it is cooperating with the authorities and providing clarifications.

Nestle said that it has taken appropriate measures to pass on commensurate benefits of GST to our consumers and was hopeful that the procedure followed to pass on these benefits will be appreciated by the National Anti-Profiteering Authority. “We have taken appropriate measures to pass on commensurate benefits of GST to our consumers,” a Nestle spokesperson said. “Where the benefit could not be passed on instantly by reduction in maximum retail price or increase in grammage, the amount was set aside to be subsequently passed on and was not reckoned either in sales or in profit.”

Legal experts said depositing the amount in the fund doesn’t give immunity to the company and the NAA could still slap a fine.