GST from 1 July: Why Arun Jaitley's soothing words on anti-profiteering rules ring hollow

The key fact that the proponents of the anti-profiteering law forgot: India in 2017 is different from India in the 1980s. There is perfect competition in a large number of sectors and market forces will bring down prices

Seetha June 22, 2017 12:03:17 IST
GST from 1 July: Why Arun Jaitley's soothing words on anti-profiteering rules ring hollow

The worst fears that the anti-profiteering clause in the goods and services tax (GST) law would result in the creation of a regulatory monster have come true.

Media reports of the anti-profiteering rules finalised by the GST Council (see here and here) show that far from it being a benign mechanism that finance minister Arun Jaitley and revenue secretary Hasmukh Adhia would have us believe, the provision is draconian to the core and has enormous potential for harassment and extortion.

The reason for such a provision is quite clear – wherever GST has been implemented, there has been an initial rise in prices and this has lasted anywhere from six months to just short of two years.

With general elections due in 2019, the government would like to keep the inflation dragon defanged till then. And anything that involves state meddling in prices will get support across the political spectrum. The five-member National Anti-Profiteering Authority (NAPA) will send out a message to industry – You are under watch; even if you don’t pass on price reductions, don’t make the mistake of increasing prices. If you do, you may be asked to explain and we will decide whether or not it was warranted.

GST from 1 July Why Arun Jaitleys soothing words on antiprofiteering rules ring hollow

Arriving at a right price for services will be difficult. Reuters

But what will the authority look into? If the tax on, say, televisions has come down by 2 percent, whether the price has been reduced by that much? Or will it also look into the cost of all the components going into the production of a television set and whether each of the many components has seen an increase or decrease in tax incidence and what the manufacturers of those components has done? Will it also look into whether or not each component manufacturer and the television manufacturer have taken input tax credit?

As Amit Bhagat, partner, indirect tax, PwC, points out, the entire manufacturing chain will have to be mapped and examined and vendors below a certain threshold may not have the kind of paperwork the authority may need to look at. “This could be very difficult to implement and these provisions can be a dangerous weapon if not supervised and monitored properly,” he says.

Perhaps the most dangerous – and bizarre - part of this anti-profiteering regime is the penalty of de-registration if a firm is found guilty of violation. It is not clear if whoever drafted these rules – and the supposedly wise finance ministers who okayed them – thought about the larger implications of closing down a functioning business. Some industry experts feel this will only be a tool to harass small and medium businesses; large companies will not be touched because de-registering them will have huge ripple effects.

Some industry experts also point out that this could become a tool to fight corporate wars, with businesses getting apparently unconnected individuals to complain about rivals in the market. This is not letting the imagination run wild. This used to happen quite often in the pre-liberalisation era.

In an earlier article, this writer had quoted Kavita Rao of the National Institute of Public Finance and Policy arguing that the anti-profiteering mechanism had little logic given that a multiple rate GST structure has been put in place just so that items are broadly taxed at the same levels as under the earlier regime. The counter to that from consumer activists as well as India’s every-ready-to-meddle-with-prices politicians and bureaucrats is that other countries have also had similar provisions. The examples most cited are that of Malaysia and Australia.

So how did that work in those countries?

Malaysia enacted a Price Control Anti-Profiteering Act ahead of GST rollout. As Jigar Doshi and Pratik Shah of SKP Group point out in this article, the government chose the net profit margin methodology – a normal profit margin was ascertained for each product on a base date and any profit charged beyond this margin was considered unreasonably high and could invite action.
Australia, Doshi and Shah note, had a net dollar margin rule – if GST led to taxes and costs falling by $1, prices needed to fall that much. Conversely, if cost increased by that much, prices could too. There, the price oversight regime established by the Australian Competition and Consumer Commission (ACCC) was in force for three years, according to this article.

The Malaysian model, says Bhagat, is not perfect but is easier to arrive at as its basis was maintaining the net margin. In India, however, there is no clarity on what the method of assessing the GST benefits for purposes of passing it on would be appropriate, acceptable and compliant.

In any case, there’s a difference between the situation in those countries and India. Many other countries had, M S Mani, senior director, Deloitte Haskins & Sells notes, just one rate of GST across all goods and services. This naturally makes it easier to calculate the cost of inputs and taxes on them, set-offs, etc.

Instead, what do we have in India? Multiple slabs with even the same product sometimes falling in different slabs. Not all the inputs going into a television set will be taxed at a same rate, the manufacturer will have to deal with multiple rates. The only person who will have a field day is the tax official and the worthies on the NAPA.

Even in Malaysia, the anti-profiteering mechanism didn’t work too well and led to a large number of disputes and enormous litigation. Later the rules were eased and given up altogether after a year. The government then limited itself to appealing to businesses not to increase prices.

Australia, as PwC’s Pratik Jain points out in this article, monitored prices for 12 months before GST kicked off and the ACCC concentrated on educating consumers and businesses. Regulation was with a light touch, as a result of which there were just about 11 prosecutions.

Is there a different way the price issue could have been handled? Yes, says Mani. For one, the anti-profiteering mechanism should have been put in place for a few goods only. “In sectors where there is less than perfect competition, it makes sense for a control mechanism to ensure price reduction. But there is perfect competition in a large number of sectors and market forces will bring down prices. India in 2017 is different from India in the 1980s,” Mani notes. There are very few sectors, he points out, where dominant players can ensure that prices are not determined by demand and supply. “Hence in most of the sectors, if one player does not reduce the price consequent to tax reduction, he would be forced to do so by other players who may try to gain market share by reducing prices.”

Secondly, he feels such a mechanism is difficult to administer for the services sector. Services are mostly intangibles and arriving at the right price for a service might prove difficult considering the fact that services can have varied pricing on account of differential reasons which are not merely related to costs.

Not that it is going to be easy when it comes to goods, given the multiple rates and the large number of vendors in the unorganised sector who may not want to come into the GST regime.

Repeated assurances by Jaitley and Adhia that these provisions are only meant to be a deterrent ring hollow. Once a tool like this is given into the hands of a bureaucracy which still hasn’t got out of the controlling mindset of the pre-liberalisation era and as long as India’s politicians don’t give up their penchant for meddling with prices, mayhem will not be far behind.

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