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Rediff.com  » Business » GST and anti-profiteering: Can it work?

GST and anti-profiteering: Can it work?

By Rashmi Deshpande and Anjali Krishnan
August 27, 2018 13:06 IST
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'These provisions may even be seen to be a threat to burgeoning businesses, since they would view every announcement of a rate cut as a starter's pistol that triggers a long race to adjust prices and to justify the adjustment,' argue Rashmi Deshpande and Anjali Krishnan.

GST
Illustrations: Dominic Xavier/Rediff.com

The anti-profiteering provisions are the most talked about and debated provisions of the one-year-old Goods and Services Tax regime.

With the roll-out of the GST regime, Parliament, as a populist measure, introduced the concept of anti-profiteering in the law.

This provision, simply put, meant that if a business enjoys increased tax credits and reduced rates of taxes, the benefit should be transferred to consumers through a reduction in prices.

The idea was to curb any inflation triggered by a change in the indirect taxation system, keeping the interest of the ultimate consumer in mind.

While this is a necessary tool for a welfare State such as India, the manner in which this provision has been implemented leaves much to be desired.

Though the procedure to be followed while conducting the investigation has been fleshed out in the rules, what is absent is the scientific methodology to be adopted to examine whether a business entity has sufficiently passed on the benefits of increased credit pools and/or reduction in GST rates.

 

The problem in not having a notified scientific method to determine whether an entity has profiteered under the GST regime is that the government has the leeway to come up with an ad hoc formula for such determination.

This would prove unfair to businesses, as they are not made aware of the methods to prove that they have passed on benefits.

In addition, this process deprives business entities from effectively defending their stance, as they have no precedent that can be followed nor any set guidelines that they know of which will be applicable in such investigations.

This would essentially mean that the process can be questioned, because it violates the set principles under constitutional law.

Moreover, considering that the provision as enacted demands a 'commensurate reduction in prices', one can argue that this gives unfettered power to the government to control the prices of all goods and services, since the provisions do not allow any adjustments for economic factors such as dilution of stock, market forces, sudden unexpected capital expenses or general increase in price of inputs, which may result in increases in the prices of goods or services.

The general trend of investigations is that the authorities fail to appreciate the scale of businesses where the price increase in a particular brand of goods may have been offset by extreme reduction in the price of another brand of goods to showcase a commensurate reduction at the overall level.

The complexities of how modern businesses are run are not considered by the authorities, since the provisions do not require them to do so.

The single-point parameter to establish passing on of the benefits of reductions in GST rates appears to be the reduction in prices, which is not justified.

Illustration: Dominic Xavier

With the increased level of scrutiny into all sectors, especially hospitality, telecom and fast moving consumer goods, where the price adjustments as a result of reduced rates can be measured easily, each business entity operating in such sectors should be prepared and take pre-emptive measures by analysing the pricing mechanism.

The expectation from the government is that a scientific formula like the one adopted in Malaysia in the form of the Price Control and Anti-Profiteering (Mechanism to Determine Unreasonably High Profit) Regulations, 2018, should be developed to ensure an impartial review.

Without a change in the existing system, it is highly unlikely that the purpose of the anti-profiteering measure would be achieved, as it would be mired in litigation.

These provisions may even be seen to be a threat to burgeoning businesses, since they would view every announcement of a rate cut as a starter's pistol that triggers a long race to adjust prices and to justify the adjustment.

In the current state of affairs, it remains to be seen if trade and industry feel compelled to approach the judiciary to set things right.

Given the fact that the anti-profiteering provisions were introduced to curb inflation and now that the government has declared that its biggest achievement at the conclusion of one year of the GST regime is to have kept inflation in check, the question is, will the continued existence of these provisions serve any purpose?

Rashmi Deshpande is Associate Partner, and Anjali Krishnan is Associate, at Khaitan & Co.

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Rashmi Deshpande and Anjali Krishnan
 

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