How to soften blow of anti-profit law

Now that the anti-profit law is a reality, there is no need to dwell on whether it should have been passed as a law. I am writing on how to soften the blow of this law on our economy.

The provision of law as in Section 171 of the GST (Goods and Services Tax) Act enables the central government to constitute an authority to monitor the prices for goods and services following introduction of GST. This is to ensure the benefit of reduction of tax or benefit in input credit is passed on to consumers in the form of commensurate reduction of prices. This job has been given to the Central Board of Excise and Customs (CBEC), the right authority to ensure uniformity.

The crucial word in the Section 171 is ‘commensurate’, which does not exactly mean equal or equivalent. They are similar words, no doubt, but not the same. So, it means when the rate of duty has fallen by four per cent, the price reduction may not be the same four per cent but commensurate, which allows taking into account the circumstances. Such circumstances are the following.

So far, of the 1,211 items for which rates have been fixed, 17 per cent are at the lower rate of 12 per cent. Along with five per cent and exempted rates, those where rates have got reduced are about 20 per cent of goods. So, for 80 per cent of goods, the rates have increased. So, the task for keeping a watch on prices is not as widespread as one would assume.

To ensure this, CBEC must begin with the manufacturers, not the traders. Unless manufacturers reduce the price, the traders cannot. And, if it is a case of a manufacturer making several products, where some have faced higher and some lower duty, then the net has to be worked out. A manufacturer will say he cannot be made to suffer a loss by not being allowed an adjustment. 

To give an example, the duty on detergents has gone up from 20 to 28 per cent but that on soap has come down from 21- 24 per cent to 18 per cent. So, the owner of a factory manufacturing both would surely argue the price will be reduced or increased according to the total gain or loss of the whole factory. A company may have three factories, like Hindustan Lever making soaps and detergents, and the company will surely like to combine the losses or gains in all the factories. So, it should be combined, not factory-wise but company-wise. 

For retailers, the situation is more complex. Manufacturers sell to wholesalers, who sell to smaller wholesalers, who sell to retailers. At each stage, there is a commission. Ultimately, the retailer has to take into account all these commissions. Just because the duty has gone down by, say, four per cent, they cannot reduce by four per cent. They are also bound by the MRP (Maximum Retail Price). So long as they sell within the MRP, they cannot be faulted. 

And, they sell so many things in one shop. Soap, toothpaste, ice-cream, hair oil and adhesives are items where duty has gone down; it has gone up for shampoo, coffee, detergents, tea, some hair oils, some cold drinks. So, retailers selling all these will also ask for adjustments, which should be allowed. Otherwise, there will be unfairness and litigation.

Conclusion: Having passed a retrograde law, the only way for the government to mitigate its impact is to make rules which will be followed by CBEC. Without the rules, the officers can go haywire and ruin the GST party. CBEC must consult industry and trade associations like Confederation of Indian Industry, Ficci, etc, and so formulate the rules to make these more user-friendly.

Rules should have the following attributes:

1. Rules must clearly say commensurate is not equal

2. Commensurate should take into account all increases and decreases of duty in a company on a combined basis, not item-wise.

3. Rules must be liberally, not strictly interpreted

If this is done, the rigours of this draconian law will be mitigated.

The writer is retired member of the Central Board of Excise & Customs.E-mail: smukher2000@yahoo.com