10 days ahead of GST launch, India Inc frets over anti-profiteering rules

Little clarity on what constitutes a breach; regulations prone to legal challenge, feel critics

With barely 10 days remaining for the launch of the national goods and services tax (GST), corporate India says it is still not sure how the anti-profiteering regulations will work.

"What the GST Council released this week was some process rules for the way cases and challenges will be handled, but it has not defined the 'how' of these rules' working," says Robert Tsang, GST implementation leader at consultancy Deloitte Touche Tohmatsu India.

The rules outline the procedure to be followed for investigation and enquiry, but not the mechanism for calculating of profiteering, says Pratik Jain, partner at consultancy PwC. "Businesses will have to themselves work these out," he adds.

Anti-profiteering regulations in Australia and Malaysia largely used the net profit margin rule to determine any 'unreasonably' high profit. Legal experts say the Indian regulations do not provide policy guidance on how GST taxpayers are to determine the extent of cut in price to meet the test of "commensurate reduction" under Section 171 of the Central GST Act.

The GST Council has announced a three-stage process of investigation, review and decision on any complaints relating to anti-profiteering. Sudipta Bhattacharjee, partner, Advaita Legal, says it might end in the discretion of the bureaucrats appointed to the 'Screening Committees' (at state-level), 'Standing Committee' and the 'National Anti-Profiteering Authority' to decide what is 'commensurate reduction'.

This discretionary aspect could also mean going to court. "The whole anti-profiteering legal framework is vulnerable to a challenge on the ground of Constitutional invalidity on the grounds of 'excessive delegation' by Parliament," says Bhattacharjee. The contention is that a separation of powers between executive and legislature is part of the 'basic structure' of the country's Constitution. While the bureaucracy can create rules/notifications to implement the objectives of a law, enacted by the legislature, the core function of law making cannot be delegated to the bureaucracy.

There are several functional issues that the regulations throw up for business. The rules don't specifically say profiteering will be product-based but indicate that the provisions will get triggered on customer complaints.

More, the rules only look at any reduction in prices from the point of either lower GST rates than prevalent or increased input credit. "Any other factor such as efficiency is not factored in," says Nimish Goel, head of indirect tax and GST at International Business Advisors.

More, the rules have not prescribed whether companies which are de-registered as a penalty may re-commence business after some time. While one option before the Authority is to ask companies to return the profiteered amount, there is no clarity on what happens to taxes paid on the higher amount, adds Goel.

Malaysia's experience in anti-profiteering regulations, says Tsang, is that the implementing rules should be simple to apply. Aggressive enforcement there of the provisions were widely criticised and also proved litigative and difficult to implement.

"Ignorance of this law is unlikely to be an excuse but some easy-to-comprehend guidance on how to stay on the right side would be welcome," says Tsang.

Why companies are fretting

• No clear-cut mechanism for determining anti-profiteering
• Rules only outline the procedure to be followed for investigation and enquiry
• Discretionary powers to bureaucracy to arrive at “commensurate reduction”  under the Central GST Act
• Vulnerable to legal challenge questioning ‘excessive delegation’ by Parliament
• No clarity on whether de-registered firms can re-commence business