Anti-profiteering - A challenge for economy
MARCH 03, 2017
By Debasish Bandyopadhyay
THE country is moving towards the ground-breaking reform in the domain of indirect taxes through implementation of GST from 1 st July, 2017. So far, the path has been gruelling with many challenging areas in shaping the necessary legislations based on the consensus of the related stakeholders. Accordingly, the government has come up with revised draft Model GST Law in the month of November 2016. Still, there are many provisions or grey areas in the said law which may disrupt the process of smooth implementation of GST in the country. In the said Model GST Law, the provision relating to anti-profiteering under section 163 is one of such areas which possibly has to stand the test of time or bear the brunt of impending controversy in the days ahead.
Section 163 of revised draft Model GST Law is reproduced here-in-below;
"163. Anti-profiteering Measure
(1) The Central Government may by law constitute an Authority, or entrust an existing Authority constituted under any law, to 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.
(2) The Authority referred to in sub-section (1) shall exercise such functions and have such powers, including those for imposition of penalty, as may be prescribed in cases where it finds that the price being charged has not been reduced as aforesaid."
On a plain reading of the above section, it can be said that the aforesaid provision is being incorporated as a price controlling or monitoring measure to ensure the flow of benefits to the ultimate consumer, so that, the assessee should actually reduce the price of goods commensurate with the reduction in the tax rate under GST regime or benefit of increased input tax credit is justifiably passed over. In terms of the aforesaid provision, for this purpose an appropriate authority may be constituted to regulate such price control measures and/or a suitable legislation may also be enacted to govern the prescribed provisions therein.
Background of Anti-profiteering
The concept of anti-profiteering is not new in the world of taxation. Probably, the experience of upward inflationary trends, post implementation of GST in other countries such as Canada, Australia, Malaysia etc. impelled the government to bring in such a clause in the revised Model GST law. Therefore, considering the possible pressure on the pricing structure based on the estimation of impact of demonetization as well as upcoming implementation of GST, government is trying to put in place such a safeguard to counter any adverse eventuality. Malaysia is having the concept of such anti-profiteering provision in GST regime through a separate legislation to govern such price control mechanism with the stringent provisions of fines and penalties for non-compliance of procedure prescribed therein. Now, the pertinent question that may arise in the context of India, whether the government will go for a separate legislation as well as constitute an authority to entrust with the enforcement of anti-profiteering measures or to rope in necessary provisions in the GST legislation itself.
Regulation and economy
Historically, India has had a much more free-market orientation than some other developing countries. Nonetheless, India's economy took a dramatic shift towards free-market post 1991. Since the said economic reform, the country has come a long way to become one of the most promising economies in the world. In the recent past, the government has taken several initiatives to take the country to the next level of reform. Accordingly, measures on the “ease of doing business" front have been resulted into positive response from the investors as well as the business community across the world. Basically, GST is also such a revolutionary move to make the country an economic superpower in the coming days. The country is pinning hope on the successful implementation of the GST to achieve the intended goal.
At this point, it is important to discuss the impact of government intervention or restrictive regulatory legislations governing the conduct of business in an economy. There has always been insoluble contradiction of government participation or intervention in many aspects of the economy. Generally, the investor or business community has been adversary of any such restrictive regulations or compliance obligations that challenge profitability or obstruct business operations. Moreover, other controlling legislations are already in existence in the country to address the fear of the government in this regard. Thus, any hurried or immature steps without having comprehensive debate and discussions across the board, may harm the prospect of investment climate in the country. Accordingly, the government should rethink on imposition of such restrictive anti-profiteering provisions on assesses who are to grapple with burden of heavy compliance requirements in the new regime.
Challenge ahead
As a result of the aforesaid development, the government may be coming up with certain mechanisms to determine the unreasonable high profits arising from the implementation of GST and keep a watchful eye on the pricing design and policy of the business community across the country. However, fixation of any limit on the profit margin above which it will be taken as profiteering under the GST regime, would be a regressive move resulting into multiple difficulties/obscurities for trade and industry.
Pursuant to the aforesaid development, business community should make necessary impact analysis of their pricing policies and identify practical elements which have a bearing on the price of the goods in order to justify the future pricing of products on the backdrop of looming anti-profiteering surveillance and monitoring. The business community should immediately start working out strategies concentrating on the following factors/areas that may impact the pricing of goods in the GST regime;
- Identify economic factors which may impact the pricing of products;
- Impact of possible change in suppliers/service providers price;
- Impact of seasonal & geographical conditions;
- Possible impact on pricing due to change in availability of input tax credit under new regime;
- Assessment and documentation of costing parameters or estimated cost affecting the pricing structure;
- Variations in tax rates in the GST regime with the existing system;
- Estimation of possible change in compliance costs in the GST regime;
- Any other factors that may impact the pricing of goods and services;
Conclusion
It is abundantly clear from the above discussion that the issue is a matter of paramount importance, therefore, if the government is determined to go ahead with the said provision, at least the policies and/or guidelines on anti-profiteering need to put in the public domain at the earliest with plentiful clarity for a smooth transition process.
(The views expressed are strictly personal)
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