GST evasion: 10% of profiteered amount as penalty is draconian when the concept of profiteering itself is nebulous

The Narendra Modi government’s obsession with foiling profiteering under the Goods and Services Tax (GST) law is going on unabated. In its first meeting after the swearing-in of Modi government 2.0 on 21 June 2019, the GST Council read the riot act to the profiteers—if manufacturers do not pass on input tax credit and other rate cuts to the consumers, there would be hereafter a hefty penalty of 10 percent of the amount profiteered as against the extant flat Rs 25,000.

FMCG majors like Hindustan Unilever (HUL) and Proctor and Gamble have been in the dock earlier over the issue of profiteering. And for good measure they have protested their innocence. The new tough measure says if a manufacturer does not return the profiteered amount to the consumers within 30 days or deposit the profiteered amount into the Consumer Welfare Fund within the same time, not only will he/she be hauled over the coals and made to do either of the two things mentioned above, but will also be slapped with a mandatory penalty of 10 percent of the profiteered amount.

It is true that GST was conceived among other things as a measure to prevent the invidious cascading effect of tax on tax. Indeed, the input tax credit is at the base of GST. Therefore, if a manufacturer indulges in self-aggrandisement at the expense of the consumer, he must be punished. But can be punished by the long arm of law or by the unrelenting market forces? The answer is obvious—it is the market forces or competition that can tame the rapacity of a trader. To be sure, penalty has a deterrent value but it can also result in harassment. Consumer literacy must be made the centerpiece of foiling profiteering so that they can vote with their feet against a manufacturer not falling in line despite the GST rate cuts.

 GST evasion: 10% of profiteered amount as penalty is draconian when the concept of profiteering itself is nebulous

File image of defence minister Nirmala Sitharaman. AFP

The FMCG majors’ refrain has been that it is difficult to reduce the minimum retail price (MRP) on packages that have already moved out from the factory and are at various stages of storage before they find their way into the hands of consumers. It is difficult to recall all the packages strewn across the country of say every sachet of shampoo and mark it with the reduced MRP. It would be expensive and disruptive. The law should mandate that the manufacturer should give immediate prompt publicity to the GST rate cut so that distributors and traders down the line can act on it. And if, let us say, a supermarket is guilty of overcharging, it is the supermarket that should be in the dock and not the manufacturer because GST being value-added tax, the buck stops with the retail seller.

Even to pin down the manufacturer and make the charge of profiteering stick is difficult except in a cost-plus industry which is a rare commodity. It is also possible in industries where the regime of price control or fixation by the government reigns, which too is rare. In all other cases, how do you prove? A manufacturer can always turn around and say that the GST burden might have come down, but salaries and overheads have gone up. Financing cost always keeps fluctuating with the changes made by the Reserve Bank of India (RBI)'s monetary policy committee.

Will GST bureaucracy’s cost auditors swoop down on manufacturers hot on the heels of a GST rate cut and go over the financials of manufacturers with a fine toothcomb? This would be harassment and return of the Inspector Raj. And to expect manufacturers and other down the supply chain to voluntarily refund the profiteered amount to the consumers or else deposit the profiteered amount with the Consumer Welfare Fund is an edict that is not likely to elicit compliance, not the least because of wanton defiance but because of the innate difficulty in zeroing on the figure of the ‘profiteered’ amount.

(The author is a senior columnist and tweets @smurlidharan)

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Updated Date: Jun 24, 2019 12:01:57 IST