There has been a lot of talk in corporate circles about the new Anti-Profiteering provisions in the GST Law.
Generally, a person who seeks or exacts exorbitant profits, especially through the sale of scarce or rationed goods is called as a profiteer. It is the same person whom we formerly called “the grafter, the extortioner, the robber”.
As per the GST Law, any reduction in tax rate (as compared to the existing laws of excise, service tax , vat etc ) on any supply of goods or services, or any benefit of ‘input tax credit’ (tax paid on purchases by the supplier), must be passed by the supplier to the consumer through a commensurate reduction in prices. Failure to do so would mean the supplier is indulging in ‘profiteering’.
The central government would set up a five-member authority to check whether input tax credits availed by a supplier, or reduction in tax rate, have been proportionally passed to the customers of those goods or services. This authority is free to decide the methodology.
The authority also has the power to impose a penalty, order a reduction in final prices, return to the consumer the amounts not passed on and cancel the registration of any person or entity that indulges in ‘profiteering’.
It becomes clear now that the input tax credit availed by the supplier (either at the time of transition or afterwards) is under a trust and it should be passed on to the next in the chain. This is to avoid double taxation / cascading effect of taxation. Further any reduction in tax rate should also be passed on to prevent conversion of tax into profit. If this is implemented in earnest the consumer will benefit by way of reduction in prices and it should generate public support for this great reform of indirect taxation.
Recently the Revenue Secretary has sought the Industry’s co-operation on pricing their goods and services keeping in mind the anti-profiteering provisions. He has also threatened the industry that the Government may use this weapon (calling it as “Bramhastra” – which is used as a last resort).
A few thoughts that come to mind:
- Is it not a reasonable expectation that in a dynamic and competitive market such as India, market forces will ensure that any reduction in an Indian business’ cost base will flow through to lower prices?
- India is more prone to price gouging and cartelization than most other developed nations. The fears of the Government of collusion among businesses to not pass on lower prices to consumers may well be justified. There may certainly be a need to supervise, oversee and regulate such unruly behavior by corporate India. But why create yet another new government body when India already enacted a Competition Act back in 2002 and created the Competition Commission to regulate precisely such behavior? The Competition Commission with a mandate to protect the consumer from industry cartelization has been fully functional for eight years now and has earned a good reputation for itself.
- It is not hard to imagine how officers of this new “Anti Profit Authority” can raise arbitrary objections to what they deem is a “fair” price of a certain good or service after a GST reduction and threaten to levy penalties.
Malaysia tried an anti-profiteering and price control law in 2011, ahead of its GST roll-out. It turned out to be a disastrous move which was counter-productive and finally abandoned. Overseas experience indicates that anti-profiteering provisions are only effective if there is a significant lead-in time to allow the relevant authority to educate consumers and businesses as to their respective rights and obligations. It is this education process that has the greatest impact on consumer confidence and business behavior.
What can the industry do to safeguard against Anti-Profiteering provisions?
- Prepare a detailed cost sheet of all goods and services on a as is before the implementation of the GST Law. The cost sheet should show the taxes paid and availed and the method of working out the final price.
- Get the cost sheet audited by the Cost Auditor as per 31st March 2017 accounts or even the latest accounts, if possible.
- Also prepare the cost sheet as it would be under the GST law with the new tax rates for inputs availed.
- Work out the difference between the old cost sheet and the new cost sheet, due to change in the input taxes. Price your goods and services accordingly by passing on the additional credits.
- Take the advice of your tax consultant on these matters.
- The above steps would hold you in good stead when some anti-profiteering officer comes knocking on your door.
Similarly make a detailed calculation for the transition credits (amounts that you shall claim on your existing stocks) that you will claim from the Government. All the transition credits have to be passed on to the consumers or buyers in the chain. You will need to give a rebate in the invoice to the buyer and show it specifically as a transition rebate. An account should be maintained to show transition credits (claim from the government) and debits (in the form of rebates). Ideally the transition credit account should be NIL when all the old stocks are consumed and / or sold.