Two sides of the anti-profiteering story

After the steep goods and services tax (GST) rate cut from 28 per cent to 18 per cent on over 175 items from mid-November, the anti-profiteering provisions and the government’s attempt to ensure that businesses reduce prices so that the customer can avail of the intended benefit have generated a lot of heat.

A rate cut, and that too by 10 per cent in one go, is a major move made by the government, which expects that this will bring down prices. And given the wide publicity of the GST Council meeting on November 10 in which the decision was taken, consumers are expecting this as well!

For restaurants (including those with air-conditioners but barring 5 Star hotels), the GST rate has been reduced significantly from 18 per cent to 5 per cent — although this does not include input credit benefit. The government probably expected that this would immediately bring down restaurant bills by at least 7-8 per cent (if not more), even after factoring in loss of input taxes. 

There has been wide media coverage of some restaurants and food chains apparently increasing their base prices so that the end price (including the GST) to the customer remains the same as before. There are also reports that in some states, the GST authorities have visited many large food outlets and scrutinised their pre- and post-GST rate cut price lists. 

The Central Board of Excise and Customs chairperson has written a letter to large FMCG (fast-moving consumer goods) players requesting them to reduce their prices. And it has been specifically pointed out that in addition to these measures being a legal requirement, industry has a ‘social obligation’ to pass on this benefit to consumers. This seems a legitimate expectation as far as the government is concerned. 

The GST Council has assumed a financial risk by agreeing to these rate cuts with the hope that this measure will lead to increased demand, enhance consumers’ confidence and give a boost to the economy. However, this will only happen if prices for the end consumer are actually reduced. 

The government’s actions clearly send out two messages. First, there is a ‘trust deficit’ between the government and industry on this issue, and second, that anti-profiteering provisions will henceforth be implemented with increased rigour. Initial talk about the “light touch”, with provisions only being meant to act as a deterrent are now over!

In this scenario, it is clear that we may well witness widespread disputes in the next few months unless industry finds a way to convince the government that it is willing to follow these provisions in letter and spirit.  Malaysia is a case in point, where a similar provision led to prolific controversies.  

Industry is largely aware of the government’s desire to reduce prices and wants to support this effort. However, there are various constraints and uncertainties. First, it’s virtually impossible for large consumer product companies to reduce their retail prices overnight, since stock is already lying with retailers. Consequently, price reduction is not really within their control and the best they can do is ‘nudge’ the retailers to reduce prices by offering a discount over the MRP. 

According to some companies, in the case of many of their products, the effective rate of 28 per cent from July 1, 2017 was a bit higher than pre-GST effective rates, but they chose not to increase the prices of these items. So, for the government to expect them to reduce prices now to pass on the entire benefit to consumers is hardly fair. Their contention does sound logical.

Moreover, the absence of detailed guidelines on the manner in which a benefit should be passed on means that businesses need to take numerous complex decisions. For example, should the profit be determined at the entity level or can this be done at the product level? Logically, since the GST rates are different for different products, it is reasonable to infer that this should be considered at the product category level. The next question is whether within a specific product category, companies need to compute each brand or SKU (stock keeping unit) separately. 

The moot question here is, is price reduction the only way to pass on the benefit? What if a larger quantity of a product is offered at the same price as earlier? Economically, this would effectively reduce the price for consumers, and at the same time be seen as compliance with the provisions. However, these are points of view and alternative ones need to be taken into consequence. 

Anti-profiteering provisions will continue to apply until June 30, 2019 — and further changes in the GST rates cannot be ruled out. Therefore, we can expect this issue to keep coming up.  

So as in most other matters, there are two sides of this story!

In this environment what businesses need to understand is the ‘spirit’ of the law and take the most pragmatic and timely actions to comply with it. It is important for them to compute the benefits by considering all the GST-related elements, based on actual data, from July 1 onwards and keep reviewing it periodically. 

The government should also understand ground-level challenges and ensure that the authorities avoid making random enquiries and physical visits to business premises. There is also an urgent need to provide unambiguous guidelines and instructions to industry on administration-related matters. 

In this very apparent friction between the government and industry, there can and should be only one winner – the consumer.

The author is leader (indirect tax), PwC