A needless compliance burden

The anti-profiteering provisions in GST would place a needless compliance burden on manufacturers

With the Lok Sabha signing off on the last set of Bills on the goods and services tax (GST) on Wednesday, the government is all set to roll out the biggest tax reform since Independence. The discussions in the Rajya Sabha are anyway nothing but a mere formality as is the case with all money Bills.

Industry is of course waiting with bated breath for the GST Council’s decision on product-specific tariffs, but the area where its fate has already been sealed is the one regarding anti-profiteering. Even though the penal provisions regarding anti-profiteering are far too vague and could discourage companies from making efficiency improvements in supply chains if they are required to pass on the entire benefit to consumers, the final Bill, which has received the Lok Sabha’s approval, retains them without any change from the draft. 

The questions, however, are getting louder. How, for example, would the GST authorities prove that there was profiteering or undue enrichment? In any case, the government will need to come up with detailed guidelines on the mechanism at the ground level. For example, will the profit be computed at the product level or the entity level? Moreover, the Bill says the GST authority will “examine whether input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate have actually resulted in a commensurate reduction in the price of the said goods and/or services supplied by him”. The question tax experts are asking is how to reduce price in a “commensurate” way? 

Any company, which makes a profit, can be declared guilty and charged with not passing on the input credits and the lower tax to customers. In the process, the anti-profiteering mechanism has the real possibility to not just hugely add to the paperwork and reporting requirements, but also unwisely widen the very scope for disputes, charges and harassment. Instead of mandating and insisting that producers pass on reduced tax rates to consumers, it would make better sense to rely on the market mechanism and fair competition. 

Clause 171(1) of the GST Bill provides that any reduction in rate of tax on any supply of goods or services, or the benefit of input tax credit shall be passed on to the consumer by way of a commensurate reduction in prices. The finer rules and regulations and penalties are not yet known, creating more uncertainties. 

The government has said the purpose is to prevent cartelisation and price manipulation. The argument doesn’t hold water as that is precisely the job of the Competition Commission and there is no need to set up yet another authority. 

There cannot be any quarrel with the finance minister’s assertion that there should not be any unjust enrichment, but allowing people at the ground level to interpret what is an unjust enrichment leaves scope for concerns over harassment.

In that sense, there is ample justification in industry’s concerns about a return to the era of socialist controls and harassment as the anti-profiteering measure is being seen as leaving more discretion in the hands of the tax authorities. “There was no reason for this provision. The best way of controlling one private entity making undue profits is to introduce competition in that sector instead,” said an industry leader.

West Bengal has an anti-profiteering Act since 1958. Called The West Bengal Anti-Profiteering Act, it was meant to curtail unjust enrichment. Even now, this act is regularly amended to control profiteering in the state. The result has been disastrous.

Industry leaders say the anti-profiteering provisions in GST would do nothing but place a needless compliance burden on manufacturers, leading to disputes and the potential for rent-seeking. They also point out that no other jurisdiction has such a draconian anti-profiteering provision in the GST law, save Malaysia where the experience hasn’t been great. In fact, it has led to a surge in litigations and allegations of harassment.

Malaysia went in for Price Control and Anti-Profiteering Regulations 2014 and charged several big companies with contravening the rules and held them guilty of profiteering. 

According to a Deloitte report, the Malaysian government wanted to ensure that unscrupulous traders do not take advantage of consumers during the changeover and intended to make sure that the profit made by an entity on the sale of any item does not exceed what it was making on that item before the GST was imposed. 

But under the regulations, the ministry of domestic trade, cooperatives and consumerism (MDTCC) only has the option of taking the matter to the court, where offenders could face fines and possibly, imprisonment. The issue was that the onus to comply with the regulations lied squarely on the business operators and, in many cases, one may almost be treated as guilty until one can prove his or her innocence. 

Deloitte said it is also difficult for a business to defend itself in court, as this instantly results in its name and alleged actions becoming publicised, doing significant damage to its brand, even if it is eventually found innocent. So most decide to settle the matter as quickly as possible even if they could justify price increases. That’s a tailor-made situation for private deals.

One way of keeping away from this charge is that a business can, for example, simply resolve not to increase prices at any stage, but this is not a practical option as costs do go up, and shareholders demand a good return on their investment.

Which way will Indian industry go?