Will GST’s Anti-Profiteering Measure Keep Prices In Check?
In the midst of a very heated address on the Goods and Service Tax (GST) in the Lok Sabha, Congress Member of Parliament (MP) from Karnataka, M Veerappa Moily suggested that "price control and anti-profiteering mechanism determine unreasonably high profit. In the Indian context we should also take some precaution so that the profiteering lobby will not thrive over this. In fact, we need to engage with the people.” He went on to add
“Some countries like Canada, Australia and many other countries have seen a rise in inflation because of switching over to GST regime.”M Veerappa Moily, Chairman, Parliamentary Standing Committee on Finance
Although this just seemed like a one-minute suggestion on the part of the MP, it probably found an earnest ear in the Finance Minister. Post several deliberations by the GST Council, an anti-profiteering measure was introduced in the new Model GST Law released on November 26, 2016.
The measure has been introduced under Section 163 of the new Model GST Law. It proposes to ‘constitute an Authority, or entrust an existing Authority constituted under any law’, which shall regulate prices during the temporary inflation phase for a prescribed period.
The said authority shall 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 said authority may have many powers along with power to penalise any person found guilty of not reducing their prices in accordance with the reduction in tax cost as ascertained above. However as a respite, Union Revenue Secretary Hasmukh Adhia clarified that these measures would not be invoked unless in the event of a significant violation.
It is ironic that GST which proposes to lower taxes to an extent, itself has measures to counter inflation.
However the math in taxes, may not always be true to its economic impact. A tax change of such mammoth nature would always lead to tax uncertainty, to which the public at large may react impulsively. This impulsive uncertainty could easily miss the tax benefits GST has to offer, and even worse, could even lead to temporary inflation.
As observed globally, tax transitions often lead to temporary inflation in product or service prices in the short run. Every country which has introduced GST, like Canada, Australia, New Zealand, has had to deal with a temporary phase of inflation before normalization in about one to two years time. It would be no surprise if India too may have to face temporary inflation. Thus to counter inflation, policy intervention may be required. The choice of its activation is best left to the government discretion.
Anti-profiteering measures have been used by many countries for combating a temporary price spike during the tax transition phase. However, the methodology of implementing anti-profiteering measures differs from one country to another. Selection of methodology shall include consideration of several sensitive economic factors like
- Suppliers’ costs
- Supply and demand conditions
- Geographical and product markets
- Existing taxes on goods
For instance, the Malaysian government chose to use the Net Profit Margin methodology to control prices. The method ascertains a Normal Profit Margin for each product on a base day (January 1, 2015 in Malaysia’s case), and any profit charged by the dealers above this base margin is considered Unreasonably High Profit. Any person found guilty of charging such unreasonably high profit is charged penalty accordingly.
Alternatively, Australia followed the Net Dollar Margin Rule which served as the fundamental principle for its anti-profiteering guidelines. That is, if the new tax scheme - GST in this case - caused taxes and costs to fall by $1, then prices should fall by at least $1. At the same time if the cost of the business rose by $1 under the new tax scheme, then prices may rise by no more than $1.
What Rule Should India Adopt?
India’s rendezvous with anti-profiteering has been rather old. Back in 1958, the West Bengal Government had enacted The West Bengal Anti-Profiteering Act which was meant to curtail profiteering activities prevalent in the region during those days. Even now, this act is regularly amended to control profiteering in West Bengal.
India, now at the doorstep of a major tax change like GST, has the option of utilising its own legislative experience, while borrowing from the rich policy experience of its global peers who have already transitioned to GST.
However, while finalising these policy decisions, India may have to consider the innumerable sensitive economic factors in the business context and consider its practical impact on the vastly unorganized Indian market.
The policy framing process may be considerably easier than the administrative task of implementing anti-profiteering measures in practice. The challenge will be in implementing a policy that can correctly identify profiteers from the rest, and penalize them ‘quickly’ for their wrongdoing. If that’s not done, the consumers will have to ultimately suffer the brunt of temporary inflation.
Along with proper implementation, the government has to also realise that the timing of initiating anti-profiteering measures will also play a major role in ascertaining the effectiveness of this policy. If global experiences are to be leveraged, India may need to implement these measures at least three months ahead of the GST implementation date. A three-month buffer shall ensure that industry has enough time to recalibrate their cost accounts in the current regime. This shall form a base to ascertain reasonable and unreasonable profits under the GST regime as per the anti-profiteering policy.
Jigar Doshi and Pratik Shah are indirect tax partners at consulting firm SKP Group. The authors often contribute to BloombergQuint.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.