Anti-Profiteering provisions – How far desirable? Anti-Profiteering provisions – How far desirable? Anti-profiteering provisions under GST-How far desirable

[Srinivasan Krishnamachari]

There is a new provision Section 171 in the CGST Act read with Rules 122 to 137 of the CGST Rules that enable the Government to constitute an authority to monitor the prices that businesses charge for goods and services, following the introduction of GST and reduce it commensurate to the GST gains , if not passed on already to consumers.

This is in line with the Constitution of India providing for price control in the concurrent list or what is otherwise called as List III of Schedule VII of entry 97 where among other things dealt therein, taxation matters are one.

The fact that Center and States have concurrent powers to legislate from list III did not however witness either of them making any anti-profiteering Legislation except in 1958 by the West Bengal Government though unsuccessfully and now after a lapse of 59 years by the Centre under the GST law.

The cue one gets from an old historical enactment of anti-profiteering from within our own country is that it should not kill the mother Legislation itself for whose protection it is supposed to stand.

The function of the anti-profiteering Authority is to examine the business cost base to ascertain the actual fact. If it is found that any business does not pass on the tax gains made resultant upon a reduction in the tax rate or enhanced availability of ITC due to introduction of GST, it should initiate action to recover those fortuitous gains.

According to expert opinion and as also from a common sense point, such a body would be needed only at the initial implementation stage of GST, to curb profiteering tendencies likely to stem momentarily in the unorganized and very small and tiny businesses for a short while.

It is possible that even large businesses can cartelize to hold on to the gains to strengthen their lobby to retain the GST gains. In such an event the role of the oversight agency assumes relevance and importance post GST.

It is also felt at the same time that it will be too difficult like finding some needles in the haystack, to pinpoint those who profited in a given case of reduction in the post GST scenario compared to before and after the tax change.

Further, the job of such an agency will be even otherwise pretty much difficult since reduction in prices could be genuinely attributable to very many factors other than a rate reduction as it is fervently believed by the Government.

May be it is good to have such an Oversight Agency in place lest the prospect of a progressive reduction in rates on the successful functioning of GST should lead to profiteering tendencies among businesses.

Well, in that sense it is good to have it but not good enough if the Government went with the hare of reform and hunted hard with the hound of Anti-Profiteering measures.

The only fear is that the GST engine should not get derailed by its own bogies of business as the smooth running of business in a co-operative environment is essential for the GST to kick in successfully.

Though the oversight agency has been formed under the CBEC, an outside organization like the Competition Commission of India would have been a more suitable choice many think.

It has reportedly both previous experience and expertise to handle such an assignment except for its lack of access to relevant price data in the Post GST scenario to arrive at its conclusions. That any way would appear the duty of the Government to make available such data to whichever agency that may be administering it.

International experience of anti-profiteering measures taken after the introduction of GST in a country like Australia tells us that the said job was entrusted to the Australian Competition and Consumers Commission (ACCC) way ahead of the introduction of GST in their Country to assess the impact of the reduction in rates on prices across various sectors of goods and services and across their country.

Penal actions were tarried and taken only in 14 cases across the country. Will you believe it and that too only on specific study and information that gains were made but were not parted to the consumers?

The result was that they were left with good enough time to gather adequate price data bearing upon taxes such that they could persuade business to pass on the tax benefits to the people in the form of reduced prices.

Even the Malaysian experiment reveals that the country prepared the business and people for two long years before GST could be introduced as a unified central tax at a meager rate of 6%. 

The Malaysian Customs Department provided enough education and software support of accounting packages to business, tuned to handle GST with ease unlike the unfortunate Indian experience of glitches ridden electronic framework that GSTN has come to acquire.

It is very unfortunate that the government should notify the NAA authority just now, and at the same time trying to simplify GST to avoid the kind of harassment that millions of producers and traders are likely to face, consequent to the strict enforcement Anti-profiteering Law, which is said to be without specific guidelines/formula to work out the measure of tax gains on account of GST rate cuts and extension ITC benefits.

Therefore, how much the National Anti-profiteering Authority (NAA) would help translate the impalpable rate reductions and ITC gains into measurable price gains for the people is a question only time can answer, is what one hears many experts say.

Given that the very policy objective has only a short shelf life of 2 years from the date of its constitution, it behooves the Government to tread softly and carefully in venturing to enforce anti-profiteering measures.

Also, there is an inherent difficulty in telling between the rate reduction and other factors to have had a positive influence on price in my personal opinion for the following reasons;

There is only a thin line between Profit and Profiteering. What is the guarantee that what business considers a normal profit may be treated as profiteering by the Government. Profit is considered a legitimate reward for risk taken by the business.

Profit is normally influenced by variety of factors like operational efficiency, demand-supply proposition, a new market advantage, Price penetration, seasonality of a product or services so on and so forth.

In such a situation, if a businessman earns a slightly higher profit it would not perhaps require under Anti-profiteering clause to pass on the benefit to his customer always?

There is no straight formula prescribed under the regulations to quantify the impact of input tax credits or the reduction in the price on account of any reduction in the tax rate with the final prices of goods or services. How to deal with this under GST remains a big question mark?

It is important that we understand fully the background to the introduction of a GST into Australia and Malaysia is important as to why anti-profiteering measures were important in those countries.

Both countries moved from a small and limited manufacturing and wholesale sales tax system on goods (and in Malaysia’s case, some services) to a broad based GST as opposed to India having the largest manufacturing and wholesale and retail tax system with a full-fledged negative list Service tax regime.

It is notable that the fundamental rule adopted in Australia and Malaysia for complying with the respective anti-profiteering rules was based on a “net dollar profit” rule.

This rule required businesses to determine their net dollar profit on individual products, or class of products, prior to the commencement of the GST (before applying GST).

And apply that same net dollar profit to the post GST cost base (taking into account reduced costs from suppliers, GST credits available instead of non-recoverable taxes etc) of the same products or class of products. GST would then apply to that new GST exclusive selling price.

Once the tax commenced, the prices set by businesses should be commensurate with the relevant market sensitivities, expectations and acceptance.

As noted by the Chairman of the ACCC, any well informed, competitive market operating in a climate of low inflation and good corporate citizenship can alone ensure that the vast majority of businesses will act fairly.

For most Indian businesses, complying with these provisions is no small matter.

It is reasonable to expect that in a dynamic, competitive and diverse market such as India, market forces will ensure that any reduction in an Indian business’ cost base on account of the GST will flow through to lower prices

As part of anti-profiteering strategies for business, they must be encouraged to follow non profiteering policies by first providing them with

a) Adequate tools and GST awareness to correctly ascertain their pricing.

b) Cost valuation mechanisms for business,

c) Transaction valuation computation tools

d) GST awareness sessions,

As part of consumer Awareness programme, Consumers are to be empowered though initiatives like:

a) Releasing shopping guides with expected price lists for major retail items,

b) Re-tweaking Maximum Retail Price (MRP) for consumer products,

c) Setting up GST Price information Cell to communicate prices to the consumers on real time basis, etc.

The empowered authority, entrusted with the functions of monitoring profiteering under GST shall first formulate a procedural method to clearly demarcate and identify profiteers from the rest.

For this purpose the authority could follow the dual layered approach of anti-profiteering measures by having a separate anti profiteering strategy one for  Businesses and another for Consumers to achieve a well-rounded and resounding success in bringing about real time price reduction agreeable to business and consumers in a happy way.

Some time, supply chain cost is reduced purely due to business efficiency. Such situations may not require price  reduction

The GST rate fixation exercise has followed largely the template of superimposition of the present central and state taxes and rounding off all the rates to the nearest higher percentage, as understood from the FM’s recent remarks.

As can be seen, the gap between the old rate and the new being so narrow except perhaps in the 178 items shifted with effect from 15th November from 28% to 18% and a few others from 18% to 12%, that it is tough to take any anti-profiteering measure at this instant.

In fact, it is argued that the entire tax fitment exercise cuts the aggregate of the old taxes so fine in relation to the new rates and careful blocking of ITC in many cases, that it would almost leave one with no big gain accruing due to the change that it should be termed unlawful.

However, whatever be the gain, it is appealed to the business of India to join hands with the Government in tackling inflation and price rise by emulating the best International tax practices of both payment and compliance of taxes.

The idea is millions of Indians should benefit richly from the recent fiscal and monetary reform measures of the Government such as Demonetisation, Abolition of black money, Price Control of pharmaceutical and Regulation of other essential commodities by imposing stock limits for agricultural commodities, subsuming multiple taxes into one tax, creation of a single national market and so on.

It is also an appeal to the Government to go slow on the anti-profiteering legislation so that business is encouraged to be self-compliant to make all the reforms of the Center a grand success.

Lastly, anti-profiteering Laws are to be handled with care like glass. If broken by excessive and careless handling, it will cut from both ends like a double-edged tool which is injurious to both business and tax collectors alike.