An anti-profiteering body is set to determine whether businesses pass on benefits of reduced taxation under GST to the consumers.
The government’s intentions in doing this may be noble, but rules on enforcing the anti-profiteering clause are hazy, leaving the door open for inspector raj.
An anti-profiteering mechanism, being set up by the government to monitor if businesses pass on the benefits of reduced taxation under the goods and services tax (GST) regime to consumers, will remain in force for two years. Under the new rules, businesses found not passing on the GST benefits to consumers will have to forfeit whatever is deemed to be the profiteered amount (from the time the GST takes effect). These companies will also have to reduce their prices by the amount commensurate with the reduction in tax incidence. The amount paid as forfeiture will go into a consumer welfare fund. The registration of such businesses could also stand cancelled.
The anti-profiteering structure is three-tiered, comprising a nine-member standing committee of the GST Council, a director-general (safeguards), or DG (S), and a five-member Authority. All complaints will first go to the standing committee. This committee will examine each case and send the serious ones to the DG (S), which will probe and give its finding to the Authority. The Authority is yet to be constituted. According to the rules, the DG (S) will look into the balance sheets of companies to find out if they have gained under the GST regime and whether such benefits have been passed on to the consumers.
Revenue Secretary Hasmukh Adhia has said the provisions of the draconian anti-profiteering rules would be used only as “brahmastra” or last resort. He has also assured businesses the government would be “very very” kind to those who report genuine mistakes.
But why should India presume that businesses will not pass on benefits to consumers? Will government’s good intentions alone stave off profiteering once GST is levied? What is the mechanism the government will use to determine whether a business has indulged in profiteering? How will it calculate pre-GST and post-GST profits? What if profits post-GST are due to other business reasons and not because of profiteering? These and similar concerns are being raised by many across India Inc, but the government does not seem to have clear answers just yet.
Besides, in a free market, competitive forces themselves compel businesses to lower prices without a taxman chasing and harassing companies. Should taxmen determine pricing?
Analysts at Nomura Global Markets Research said in a note to clients this week that though corporates would pass on the direct benefits of GST (like a lower tax rate), they would aim to retain partly (if not fully) the indirect benefits from the saving in logistics costs, streamlining of business processes and the seamless flow of input credits. After all, businesses exist to make profit!
The Nomura analysts also said the anti-profiteering measures would be difficult to implement. “We believe such measures are difficult to implement and would be a retrograde step, similar to price controls, if implemented in haste. First, it would be difficult to assess the commensurate price cuts (due to difficulties in the estimation of the benefits of GST). Second, the government may not have sufficient bandwidth to check/monitor the pricing/profitability of the entire gamut of tax-paying entities. In our view, pricing/profitability would be driven more by industry dynamics, rivalry and competitive intensity than by government directives on price cuts.”
But the fear of anti-profiteering crackdown is already working wonders. A separate set of Nomura analysts has pointed out that retail prices are likely to fall by up to 7 per cent for automobiles and due to the anti-profiteering clause, “we believe these savings would be passed on to customers. This may help improve demand, and reduce discounting pressures, particularly for M&M’s UVs and to some extent for Maruti Suzuki. We continue to see the impact of GST being positive for the overall consumer sector.” So anti-profiteering would actually help car buyers post-GST.
Similarly, these analysts find that Colgate would benefit from GST despite the anti-profiteering clause. This is significant since the new tax regime would otherwise be largely neutral for most manufacturing companies and positive for those retailing consumer products (shampoo, hair oil, soap, toothpaste, so on).
“A significant beneficiary, in our view, is Colgate Palmolive… From an average tax incidence of 23-24 per cent, the company now has to pay a GST of 18 per cent. While the anti-profiteering clause mandates the company to pass this benefit to consumers, we still see Colgate benefitting in two key ways. First, the reduction in prices will allow the company to be placed at a price similar to peers with herbal products such as Patanjali (unlisted) and Dabur which are currently at a lower tax rate of 12 per cent, which might help in recording higher volumes and market share gain. That apart, we expect some benefits to accrue from the input tax credit on the service tax paid on certain expenses.”
But not everyone seems to think that an anti-profiteering mechanism is draconian. KPMG partner and head (indirect tax) Sachin Menon said, “On the face of it, this provision doesn’t look like it is giving unbridled power to the GST officers to harass tax payers….it will create fear in the minds of people who intend to exploit GST to make more profits”.
In fact, an anti-profiteering clause has been inserted by some other countries too while introducing GST. Australia implemented these rules for two years and sought monetary penalty from more than a 1,000 dealers under its anti-profiteering laws, said one GST expert. And this piece in Business Standard quotes another tax expert as saying that for 12 months before the commencement of GST, the Australian Competition and Consumer Commission devoted resources to educate consumers and businesses – through publication of price guidelines, communication strategies and hotlines as well as extensive monitoring of prices. The lesson from Australia is clear: anti-profiteering needs extensive consumer education and preparation.
Malaysia, another GST country, in fact backtracked after first implementing the anti-profiteering rule for all goods and services in 2015. The Business Standard piece says now Malaysia has limited the applicability of anti-profiteering rules to food, beverages and household goods. So, services are out of its ambit. Malaysia’s anti-profiteering rules were drawn up on a formula-based approach. The prescribed formula for determination of net profit margin took into account taxes, supplier costs, supply and demand conditions, circumstances of the geographical and product market, and so on.
Coming back to the Indian example, it is clear that though the government’s intention in bringing an anti-profiteering clause may be noble, its rules on enforcing this clause are at best hazy. Taxmen with draconian powers could be a return of the inspector raj. Let us hope that the anti-profiteering provisions would be used sparingly and even in these select cases, after proper due diligence.