The government has released revised drafts of the model goods and services tax (GST) laws that will be discussed by the GST Council at its meeting starting on Friday. The draft laws are expected to be finalised at this meeting so that the government may table them in Parliament next week and pave the way for rolling out the new indirect tax regime from April 2017. A significant provision in the draft laws pertains to the exclusion of securities from the definition of goods. Earlier drafts had allowed securities to be defined as goods, giving rise to concerns that GST rates would be applicable to securities as well. That would have caused mayhem in the capital market as a GST levy on securities, over and above the securities transaction tax, would have been preposterous. The clarification, therefore, is a welcome relief. Similarly, the proposal to zero-rate supplies made to special economic zones deserves to be endorsed as this will improve the ease of doing business for the many units that continue to operate in more than 200 such conclaves. Without this provision, suppliers of goods and services to units operating in these zones would not have been able to enjoy the benefit of refunds of taxes paid by them in intermediate stages of their value chain. There is, however, a new provision in the draft GST laws that is problematic, both conceptually and operationally.
An “anti-profiteering” measure has been proposed to ensure that trade and industry pass on the benefits of reductions in tax rates to consumers. The proposal also envisages the setting up of an anti-profiteering authority — a reflection of the government’s flawed thinking and its predilection for creating new structures that often become the parking place for retired civil servants. Presumably, the new authority will monitor business transactions and even intervene when necessary to prevent what it perceives to be profiteering.
The proposal has many shortcomings. To begin with, it ignores the obvious difficulty and challenges of differentiating profits from profiteering. There are no textbook definitions of when profit becomes profiteering. If an authority is tasked with defining profiteering in a business, which then is forced to disgorge the “extra” profit for the benefit of consumers, the much-dreaded inspector raj will rear its ugly head once again and harassment to businesses will rise. Worse, discretion and opacity in defining what constitutes profiteering will provide fresh fuel for corruption.
It is ironic that a government that came to power with the promise of minimum government and maximum governance will preside over the creation of such an authority that essentially belongs to the pre-liberalisation era. An unjust enrichment fund had been created in 1989, where businesses were required to park their gains from duty cuts, but the impracticability of the idea soon dawned on policymakers and it was given a quiet burial. The idea of an anti-profiteering authority is no less impracticable and its potential for causing harassment to businesses is immense. The proposed GST structure is already handicapped by the multiplicity of tax rates and exemptions that will allow more discretion in decision-making and could lead to more classification disputes. This idea should be given up as soon as possible.