- February 28, 2017
- Posted by: Aditya Kumar
- Categories: GST, Taxation
Amidst the spirited and sometimes heated discussions on the Goods and Service Tax (GST) in the Lok Sabha, M Veerappa Moily observed that “price control and anti–profiteering mechanism helps in determining unreasonably high profits. In the Indian context, we should take some precautions so that the profiteering lobby shall not thrive over this. Some countries have seen a rise in inflation because of switching over to GST regime.”
This observation immediately caught the attention of the Hon’ble Finance Minister and post several deliberations by the GST Council, an anti-profiteering measure was incorporated in the newModel GST Law released on November 26, 2016.
The broad issues that are being addressed in this article are :
- Definition of Anti-Profiteering as per the Act and in common parlance;
- How it will impact the business and what are the issues that come along with having a clause such as this; and
- International/Best Practices,
(i) ‘Anti-Profiteering’ means to stop a person from earning unreasonable profit through sale of goods and services. ‘Unreasonable’ in itself is a subjective word and needs to have enough checks and balances to make it objective. The new draft on GST law introduces the provision of “Anti-profiteering” in Section 163 which enables the Central government to constitute an “Authority” to monitor:
a) the price charged for goods and services in the lead-up to, and following the introduction of, GST; and
b) that trade and industry pass the benefits of input tax credit or reduction in tax rates to consumers.
(ii) The Authority shall also have the power to impose penalty in cases where it finds non-compliance with the above provisions.
From the above definition, it is aptly clear that the Authority would have the powers vested in it to conclude that the price being charged is excessive on account of introduction of GST and that the benefit of GST has not been passed on to the customers. As a result, any business would feel that their right to do business is impacted as in a competitive world, one may charge any price to its unrelated buyer. However, to ensure that the businesses are not impacted they must:-
a) Carry out an exercise on the impact of GST on the organisation at various levels (product , geographic and entity ) wherein, they should estimate the impact of input credit and link the impact on the pricing;
b) prepare and maintain adequate documentation in this regard for any other external factors that has impact on the pricing being charged to the customer;
c) carry out an impact analysis of non-recoverable input tax credits – pre-GST and post-GST;
d) claim all refunds that they are entitled to and then work out the pricing strategy keeping in mind the said refunds; and
e) determine efficiencies due to GST resulting in reduction of supply chain related costs. This may be very subjective, but surely business would be tracking the operational profitability derived out of the implementation of GST.
One aspect that comes out clearly is that organizations will have to back up the pricing for the services/goods supplied. In terms of services there may be a lot of challenges as many times, the pricing model of entities is very subjective. For the same set of services one may charge a customer Rs. 1000 and another customer Rs. 10,000 depending upon the complexity of the transaction. How the said administrative body will determine ‘Anti-profiteering’ measures in such cases is something that would need to be seen.
Of course, one question that arises is, how does this play out internationally. Are there any jurisdictions that have a similar set up. Well, this term and the concept is adopted by various countries such as Australia and Malaysia amongst others. Compared to the GST law which is approximately 60 years old, the anti-profiteering provision is only 17 years old as Australia was the first country to enact this provision in July 2000. The roadmap of the Australian Competition and Consumer Commission (ACCC) was to educate the consumers and businesses through publication of price guidelines, communication strategies and hot lines. Education was followed by extensive monitoring of prices through Net Dollar Margin Rule for 12 months before the commencement of GST.
Malaysia also introduced this provision in April 2015. They chose to use Net Profit Margin methodology to control prices. However, it led to widespread litigation and was found to be administratively difficult to implement.
International experience indicates that anti-profiteering provisions are only effective if there is a significant lead- time to allow the relevant Authority to educate consumers and businesses as to their rights and obligations and monitor the prices and we hope that India, before foraying into these provisions, learns from the best practices and experiences of it’s Asian counterparts.