One of the purposes for implementation of Goods and Services Tax [“GST”] in India is to subsume convoluted indirect taxes and to widen indirect tax base along with seamless credit across the entire supply chain in the country. India is one of the biggest and latest countries to implement GST (or common VAT) in the World.
Many countries that have adopted GST in recent past have witnessed that in post- GST, though there is a reduction in costs due to enlarged input tax credit, tax entities citing GST as the reason, hike prices which spurt in inflation as compared to the previous tax regime. In effect, the ultimate customer, who is supposed to be benefited due to GST, is at disadvantageous position.
In order to contain this expected price inflation and to protect the interest of customer, Anti-profiteering regulations are resorted to while implementation of GST.
The concept of Anti-profiteering is relatively new in GST, as only two countries – Australia and Malaysia have introduced anti-profiteering mechanism while implementing GST in their countries. Hence, in absence of history, it is difficult to understand exact impact of Anti-profiteering mechanism in GST regime.
Anti-profiteering measure: scenario in India.
Anti-profiteering measure as part of a GST legislation in India was brought through Model GST Law in November, 2016 and was enacted as a part of Central Goods and Services Tax Act, 2017 [“CGST Act, 2017”] passed by the Parliament.
As per Section 171 of CGST Act, 2017, if there is a reduction in rate of tax on any supply of goods (or services) or the benefit of input tax credit, the taxable person shall pass it on to the recipient by way of commensurate reduction in prices.
Further, the government under sub-section (2) of Section 171 made rules for constitution of the Anti-profiteering authority to address issues arising out of Anti-profiteering in the country.
At the end of 23rd GST Council Meeting held on 10th November, 2017 in Guwahati, the Finance Minister Arun Jaitley, while addressing the media on reduction in GST rate to 5% on restaurants said that “all members of the GST Council felt that input tax credit (ITC) to restaurants is not passed on customers. Goods and Service Tax (GST) was being charged on existing rates which put additional tax burden on restaurant goers. Thus, we decided that restaurant industry will not get the benefit of ITC”,
Though this appears to be good news for the general public but it is clear that despite of having legal mechanism on hand, the government did not act swiftly to tackle profiteering motives of restaurants and thereby failed to protect the interest of customers.
Under Rule 126 of the CGST Rules, 2017, Power to determine the methodology and procedure vests in the Anti-profiteering authority. As the authority has been not been notified and therefore there are no rules on how ‘profiteering’ would be computed. In absence of this, India Inc. is in quandary on the following important points –
(1) Section 171 of CGST Act, 2017 prescribes that if there is a reduction in rate of tax on any supply of goods (or services) or the benefit of input tax credit, the taxable person shall pass it on to the recipient by way of commensurate reduction in prices. Now, what is “commensurate” must be clearly defined. Commensurate not necessarily mean ‘Equal’. It is difficult to measure how much would amount to commensurate reduction in prices w.r.t. a lower tax incidence;
(2) There is a thin and subjective line between Profit and Profiteering. What business considers a normal profit may be treated as ‘profiteering’ by GST department. Profit is considered as the legitimate rewards for risk taken by the entrepreneur. Now how and when the legitimate reward would become illegitimate that must be aware of and that too in advance.
(3) Profit is normally influenced by variety of factors like operational efficiency, demand-supply proposition, first mover advantage in a new market segment, Price penetration, seasonality of a product or services so on and so forth. In such a situations, if a businessman earns a slightly higher profit (which he rightly so due to risk he has taken), would it require under Anti-profiteering clause to pass on to his customer always?
(4) There is no straight jacket formula to identify impact of input tax credits or the reduction in the price on account of any reduction in the tax rate with the final prices of goods or services. How to deal with this under GST?
(5) What if, supply chain cost is reduced purely due to business efficiency? Do such companies also require to reduce prices?
(6) It is not clear as whether the profit analysis for Anti-profiteering is required to done at entity level or product level. If one product is earning super-normal profit due to it’s positioning in the market whereas the entity is incurring losses. In such cases, where Anti-profiteering would be imposed at product level or at entity level?
(7) While comparing pre-GST profit with that of post-GST, the basis of valuation itself would be different. For instance, a product was under MRP based valuation of Central Excise which is not there under GST. How to compute pre and post-GST profit in such cases?
(8) Determination of the input tax credit is tougher in case of multi-product companies or in case of companies deals in bundled sales.
(9) If any Company genuinely wants to reduce MRP of its products and it is governed by Legal Metrology Act 2009, which does not permit alteration of MRP on the packing. How to deal with such situation?
(10) Generally, Anti-profiteering provision is imposed when GST is newly implemented. Anti-profiteering is a transition provision to check the prices of essential goods and services from ultimate customer point of view. But it is not known how long Anti-profiteering provision will be monitored by the government.
(11) The government should ensure that the methodologies of profiteering are clearly defined, failing of which it will be open to misuse. Further it should also to be seen that the Anti-profiteering authority does not act a Price Regulator for any sector or industry.
In view of the above tricky questions, it is high time that the government should come out with a detailed methodology or guidelines on how Ant-profiteering would be computed under GST. After taking views of all stakeholders on such important guidelines, it should be implemented so that the real benefits of GST will reach to the ultimate customers of the Country.
(The views expressed in this article are strictly personal)
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