Feb. 16: Copywriters, beware of the consumer armed with the calculator.
The apex consumer commission has ruled that when a company promises a "30 per cent discount", it should not take a penny more by charging other levies or it should ensure the maximum retail price does not mislead customers.
The National Consumer Disputes Redressal Commission found fashion chain Benetton India guilty of an unfair trade practice when it asked a customer to pay value-added tax on a pair of trousers that was being offered on discount.
The commission also rejected the contention that the absence of the word "flat" in the advertisement (as in "flat" 30 per cent) gives sellers the freedom to add other charges. Whether the word "flat" is mentioned or not, such offers by themselves mean a "flat discount on the maximum retail price", the commission said. The commission did not go into the merits of VAT itself but it focused on whether the company misled customers or not.
What the order means is that companies or shops should either mention the precise discount rate or include all charges in the maximum retail price mentioned and then offer eye-catching discount rates such as 30 per cent or 50 per cent.
Conversations with Calcutta retailers suggested that not many are following such a precise yardstick while offering discounts.
In the Benetton India case, the original price of the pair of trousers was Rs 2,299 but the apparel was offered at a 30 per cent discount. When Ravinder Singh of Amritsar bought the pair of trousers in 2014, he did so on the calculation that he would have to pay Rs 1,609 and small change (30 per cent of Rs 2,299). But he was asked to pay an additional Rs 97 and small change as 6.05 per cent VAT on the discounted price.
Ravinder felt aggrieved and complained to the district consumer forum that when the pair of trousers was offered at 30 per cent discount on the tag price, which included taxes, the addition of VAT on the discounted price amounted to overcharging.
Benetton India contested the charge of unfair trade practice, saying the apparel was offered on discount subject to the payment of the VAT.
The district consumer forum was not impressed. It asked Benetton India to refund Ravinder the VAT of Rs 97 and small change and pay him a compensation of Rs 5,000 as well as Rs 1,000 for cost of litigation.
Benetton India approached the state consumer commission, which upheld the order of the district forum, following which the company moved the apex commission. At the national commission, Justice Ajit Bharihoke, a former Delhi High Court judge who had heard cases like the Bofors scam and the JMM bribery scandal, heard the trouser complaint.
Justice Bharihoke clarified that he was not going into the question of whether VAT was valid or not but his brief was limited to the issue of whether Benetton India "indulged in the unfair trade practice by giving a misleading offer to the customers and thereafter overcharged them by charging VAT on the discount price".
The retired judge found no merit in the company's contention and upheld the orders of the district and state consumer panels.
Benetton India had pointed out that the word "flat" was missing from its advertisement about the discount.
But Justice Bharihoke said in the order: "Merely the absence of the word 'FLAT' in the offer of the petitioner will not make any difference because the discount of 30 per cent on MRP (maximum retail price) by itself means that discount is 'FLAT' discount on the maximum retail price."
The apex consumer commission focused on deciding whether the company misled customers.
Had Benetton wanted to offer a discount but charge the VAT and avoid the charge of misleading customers, it would have had to say it was offering a discount of a little over 25 per cent, not 30 per cent. Or its stated maximum price should have reflected the VAT also.
According to retail industry sources in Calcutta, the VAT is added to the discounted price of an item in two ways.
The usual practice is the VAT is calculated on the retail price after the discount. "If the price of an item is Rs 10,000 and there is a 50 per cent discount offered on it, then the 5 per cent VAT is calculated on Rs 5,000 and billed to the customer. This is mentioned in the bill," said the manager of a retail store in Calcutta. The bill will come to Rs 5,250.
However, in some stores selling luxury fashion brands, the VAT is first calculated on the original price and then the discount is calculated.
"In this case, the 5 per cent VAT is added on the product costing Rs 10,000 and the retail price would go up to Rs 10,500. Then the 50 per cent discount would be calculated on the product and the actual price the consumer has to pay will be Rs 5,250," said another manager of a retail store. (The manager was giving a simplified example to explain a complex process. Actually, the government charges VAT on input costs, to which margins are added at several levels to arrive at the maximum retail price. When a discount is given, it is usually offered on the margin.)
In both cases, the final amount is the same. But if the luxury stores are advertising the retail price that includes the VAT, they are in compliance with the apex consumer commission's order.
Shops following the other practice - the VAT being calculated on the discounted price - cannot claim they are offering a 50 per cent discount. They are actually offering a discount of 47.5 per cent on a maximum retail price that is being shown as Rs 10,000.