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Anti-Profiteering - A 'hard catch' with 'light touch' approach

APRIL 04, 2017

By Prabhat Ranjan, CA

ONE of the unique features of the revised draft model GST law released on 25th November 2016 is clause on "Anti-Profiteering". This provision has made its solid place even in the Central Goods and Services Tax Bill, 2017 (CGST Bill) tabled in the Parliament and passed on 29th March 2017.

What is Anti-Profiteering? - A simple meaning of it may be "to deprive you from the profit which you are not entitled to". Section 171 of the CGST Bill, 2017 (Section 163 of the revised Model law) states "any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices". If we closely analyse this clause, it has two limbs - (1) benefit due to reduction in rate of tax i.e. differential benefit between current rate of tax and the corresponding GST rate on same goods / services and (2) benefit on account of increased input tax credit.

The objective of this move is to protect consumers from inflation after GST implementation. The implementation of GST has often led to some inflationary pressures in countries where this tax is already in place. But while the objective may sound simple, implementing an anti-profiteering clause is fraught with grave risks.

In this article, an attempt is made to highlight the international experience we have on this clause especially from Australia and Malaysia wherein GST law was recently implemented with associated anti-profiteering measures. Though it may or may not be officially declared but the Indian legislators have consulted these two countries while drafting and considering this clause in Indian GST law.

International experience: Australia and Malaysia included GST anti-profiteering provisions in their respective laws and which was two-fold, namely:

- to protect consumers from businesses "profiteering" from the change in taxation systems; and

- to ensure inflation did not exceed expectations given the change in tax systems.

Malaysian Experience:

In Malaysia, The Price Control and Anti-Profiteering Act, 2011 (PCAP Act) was made applicable to operationalise the Anti-profiteering measures in GST which was implemented in Malaysia with effect from 1st April 2015.

Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) was empowered to take action against businesses deemed to have made excessive profits from the implementation of GST, via an 18-month monitoring mechanism that began on January 01, 2015 and ended on June 30, 2016 which was later extended to December 31, 2016.  Also, the mechanism to determine 'unreasonably high profit' was introduced by the Price Control and Anti-Profiteering (Mechanism to Determine Unreasonably High Profit) (Net Profit Margin) Regulations, 2014 ('PCAP Regulations'). The PCAP Regulations stipulate a prescribed formula for the determination of unreasonably high profits for the prescribed timeframe. On an application of the formula, the net profit margin of a business in the current period must not exceed the base period, i.e., January 01, 2015.

In terms of said Act, profiteering, i.e., realising 'unreasonably high profits' on the sale or supply of goods and/or services was made an offence so as to protect consumers against unreasonable increase in prices of goods and services following the implementation of GST in Malaysia. The Price Controller, with the approval of the MDTCC, was enabled to determine the range, i.e., the maximum and minimum prices as well as the fixed price for any goods or services.

As on November 2015, more than 11,000 cases of profiteering cases are pending investigation in Malaysia.

The Malaysian Government took strict measures to ensure that all the stake-holders were well-equipped to handle the transition to GST, while also setting in place the necessary safeguards for undue profiteering.

As on June 2016, Malaysian Govt. decided not to continue with the existing mechanism of determining unreasonably high profits due to the clash with its principles of a free market economy, and also on account of the existing mechanism not reflecting prevalent business practices where the profit margins were determined in percentages, instead of on actual amounts.

The above clearly indicates that Malaysia being a developed country failed to implement "Anti-Profiteering" clause successfully in the country and many litigations have piled-up for resolution which created uncertainty amongst the trade and industry.

Australian Experience:

Australia (which introduced GST effective 1st July 2000), empowered a special authority called Australian Competition and Consumer Commission 'ACCC', to ensure that, post implementation of GST, the benefits of the price reduction caused by abolition of sales tax and other taxes were passed on by businesses to their consumers. During the three year period from July 8, 1999 to June 30, 2002, anti- profiteering measures in Australia revolved around the 'Net Dollar Margin Rule' serving as the fundamental principal for its guidelines i.e. if the changes caused taxes and costs to fall by , then prices should fall by at least . At the same time if the cost of the business rose by under new tax system, then prices may rise by not more than .

For the period from July 1999 and 31 December 2001, over 6,500 GST - related matters were investigated by the ACCC. The reasons identified were: (1) over-charging; (2) illegal levy; (3) business could not appropriately validate and account for the differential amount between prices under the existing and new regime of taxes.

Emphasis is warranted on the fact that ACCC's role in price-monitoring ceased on the appointed date of 30 June 2002. However, they continue to regulate the advertisement sector in respect of false or misleading conduct involving GST pricing, i.e., price inclusive or exclusive of taxes etc.

By doing so, the Australian Government sought to clamp down on unfair practices where the benefit of reduced costs under GST did not trickle down to the ultimate consumer.

Indian Experience

The concept of anti-profiteering measures is not outlandish to India. Indian lawmakers have already enacted The West Bengal Anti-Profiteering Act, way back in 1958 which were meant to prevent profiteering in certain articles in daily use like Rice, Wheat, Pulses, Edible oil, Sugar, baby food, Drug and medicines, skimmed milk powder, etc.

"Profiteering" means sale by a dealer of any scheduled article at a price higher than that fixed under Section 3 of the aforesaid Act. Dealers who profiteer are liable to be punished with rigorous imprisonment or with fine or both.

In 1963, Central Bureau of Investigation (CBI) was established for investigation of crimes, including the defence related cases, black-marketing and profiteering in essential commodities.

The CGST Bill, 2017

The Indian GST Law makers are perhaps influenced with the global practices and also have the Indian legacy to introduce anti profiteering measures which is introduced through Section 171 of the CGST Bill, 2017 (Section 163 of the revised Model law). The Section proposes to constitute an 'Authority', or entrust an existing Authority constituted under any law, to regulate the pricing of goods and services and establish that the benefit of increased input tax credits and reduction in rate of taxes are actually passed-on to consumers.

Impact on Transitional Provisions

Section 140 (3) of the CGST Bill, 2017 reads as under:

"(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely: -

i. such inputs or goods are used or intended to be used for making taxable supplies under this Act;

ii. the said registered person is eligible for input tax credit on such inputs under this Act;

iii. the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

iv. such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and

v. the supplier of services is not eligible for any abatement under this Act:

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed."

Now, let's analyse the above provision. Assuming a depot of a manufacturer falls in two situations i.e. (1) where he has the document evidencing payment of taxes and (2) where he doesn't have a document evidencing payment of taxes.

In the first situation, where he has the tax payment evidencing document, the plain reading of the law suggests that he is not required to pass-on the benefit of the input tax credit while in the second situation where he does not have a tax payment evidencing document, he needs to pass on the benefit of input tax credit by virtue of proviso introduced.

The recently announced "Transition Rules" on 31st March 2017, suggests that in second type of situations, 40% of the Credit will be allowed on supply of such goods after the appointed date and shall be credited after the central tax payable on such supply has been paid.

After reading the above, its international legacy and considering the Indian trade practices, it is not that easy to implement this clause.

Conclusion

The real challenge is for trade and industry. The key challenge is that whether this clause will have its implications at product level or brand level or business vertical level or at a company level?

In my view, it should be measured at company level and not at each product level, however the other interpretations are also possible. Also, the Govt. should protect the company's current profit margins (considering no change in method of business and its nature) and should adopt a balanced approach between trade and consumers.

In a recent interview, the CBEC chairman had mentioned that the Govt. will adopt 'light touch' approach on anti-profiteering, but it would be interesting to see how and when the Govt. frames the body to monitor this clause's implementation.

The key challenge for law makers and its protectors will be to implement anti profiteering policy which can correctly identify profiteers from the rest and penalize them 'quickly' for their wrong doing or else 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. This three month buffer shall ensure that the industry has enough time to recalibrate their cost accounts in the current regime which shall form a base to ascertain reasonable and unreasonable profits under the GST regime as per the anti-profiteering policy. Considering this 3 month's theory, whether GST should be implemented from 1st September 2017 and should the trade and industry be asked to implement Anti-Profiteering measures from 1st July 20217 so as to have "Good and Simple Tax". Interesting time ahead to watch and implement this biggest reform in Indian Tax history.

(The author is a Chartered Accountant & Company Secretary and works with a leading Pharma company and the views expressed in this article are strictly his personal views).

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Also See : TIOL TUBE Videos on GST

 

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 


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