The Government has actively started considering a reduction of GST rates for goods and services to keep the economy on the growth path. In this context, its important for all Entrepreneurs to under anti-profiteering regulations under GST. The basis of anti-profiteering provisions in the GST rules is to ensure that any reduction in GST rate and associated input tax credit benefit is passed on to the end consumer by way of reduction in prices. In this article, we look at antiprofiteering provisions under GST in detail.

What is the meaning of anti-profiteering under GST?

Any reduction in GST rate or benefit of input tax credit should be passed on to the end consumer and not retained by the business. This is the basis of anti-profiteering provisions under GST. Under anti-profiteering provisions, its illegal for a business to not pass on benefits of GST rate benefits to the end consumer and thereby indulging in illegal profiteering. The Anti-Profiteering Rules, 2017 lay down details about the selection of the members of the NAA and the other committees that will assist the NAA in investigating the complaints, the procedure to be followed in investigations and the powers given to the authority. Once the registered entity, which has profiteered illegally, is identified, it can be asked to – one, reduce prices if it has hiked prices too much and, two, if price reduction due to GST has not been passed on to customers, to return to the customer the sum equivalent to the price reduction along with 18 per cent interest from the date the higher sum was collected. The authority can impose penalty on the profiteer or cancel its registration.

As per Section 171 of the CGST/SGST Act, any reduction in tax rate on any supply of goods or services, or any benefit of ‘input tax credit’, must be passed on to the recipient (for example, customer) by the registered person (e.g., trader) through a commensurate reduction in prices. Thus, if a trader is paying, say, Rs 100 less in the new tax rate on a certain item, he has to compulsorily sell that item for Rs 100 cheaper, so the customer benefits proportionally. Failure to do so would mean the trader is indulging in ‘profiteering’. Sec 171 also states that the central government would set up an five-member authority to check whether input tax credits availed by a “registered person”, or reduction in tax rate, have been proportionally passed to the customers of those goods or services. Industry is not sure how this will be implemented in practical terms. This authority is free to decide the methodology to determine if reduction in rate of tax on the supply of goods or services, or the benefit of input tax credit, has been passed on to the customer through a commensurate reduction in prices. The authority also has the power to impose a penalty, order a reduction in final prices and cancel the registration of any person or entity that indulges in ‘profiteering’. With introduction of Anti Profiteering measures, the Government is expecting companies to cooperate in achieving its objectives. Despite introduction of the new dimension, the government is hopeful that they would don’t have to use the weapon. The Government authority has demanded “cooperation” from corporate India on pricing of their goods and services after the implementation of goods and services tax (GST). In other words, the authority is expecting that the pricing of goods and services should be in compliance with the government’s expectations. If companies failed to comply, it is warned that the government has a weapon to unleash on them-the “anti profiteering” clause. This new “weapon” in the arsenal of the Union government has been designed and launched as part of the GST Bill. The government can now create a new “Authority” which will decide whether businesses have reduced their prices “enough” when there is a reduction in the GST rate of a particular good or service. Illustration Let’s understand in this way: Today, a ghee dosa at a popular restaurant in New Delhi costs Rs160. The same dosa in the same chain in Chennai costs Rs 80. GST rates of ghee are now fixed at 12%, which is a reduction from the current 12.5% tax for ghee in Delhi but an increase from the current 5% in Chennai. But GST rates for services in an air-conditioned restaurant are 18%, down from 22% in both the states. So, as per the government’s “expectations of cooperation”, this restaurant should now drop its price of ghee dosa in its outlets in Delhi and the quantum of this price decrease should be a precise weighted average of the GST rate reductions of half a percentage point for ghee and four percentage points for service tax. Ostensibly, an officer from the new “Anti Profiteering Authority of India” will now do this calculation and inspect the restaurant in Delhi to check if the price of ghee dosa has indeed been reduced by this amount. This is the weapon the government has threatened to unleash, if goods and service providers fail to comply. It is a bit unclear if the government also expects the Chennai outlet of the restaurant to match the revised price of ghee dosa in the Delhi outlet under the slogan of a “one nation, one ghee dosa, one price” India is on the threshold of capsuling down hundreds of different tax rates of thousands of goods and services across 36 states and Union territories into just five tax rates. This is an extraordinary achievement, in the backdrop of stark economic, political and social disparity of the different states of India. There is much consternation among policy analysts and economists over multiple GST rates rather than just one rate for all goods and services. Poetic as it may have been, a “one nation, one tax” was never possible in a diverse and complex federal polity, such as India. Multiple taxes were inevitable to assuage India’s 3-3-3 paradox – the three richest states being three times richer than the three poorest states. Instead, what should enrage economists and commentators is this potential throwback to the 1960s. Phrases such as “anti profit”, “authority”, “expect cooperation from businesses”, “weapon”, etc., bandied about in public by one of India’s senior most bureaucrats, is unbecoming of a nation that just celebrated its silver jubilee of “economic liberalization”. The last time India had an anti-profiteering legislation was the West Bengal Anti-Profiteering Act of 1958. To be sure, India is not the only country to conjure up an anti-profit legislation. Malaysia tried an anti-profiteering and price control law in 2011, ahead of its GST roll-out. It turned out to be a disastrous move which was counter-productive and finally abandoned. Lest this be misunderstood as some paean for efficiency of free and unfettered markets, I readily admit that India is more prone to price gouging and cartelization than most other developed nations. The fears of Revenue authority and the GST Council of collusion among businesses to not pass on lower prices to consumers may well be justified. There may certainly be a need to supervise, oversee and regulate such unruly behaviour by corporate India. But why create yet another new government body when India already enacted a Competition Act back in 2002 and created the Competition Commission to regulate precisely such behaviour. The Competition Commission with a mandate to protect the consumer from industry cartelization has been fully functional for eight years now and has earned a good reputation for itself. Rather than create yet another regulator, the GST law could have merely conferred referral powers to the GST Council to refer suspicious cases of price hoarding to the Competition Commission. It is not hard to imagine how officers of this new “Anti Profit Authority” can raise arbitrary objections to what they deem is a “fair” price of a certain good or service after a GST reduction and threaten to levy penalties. From the expectation of the Government, it could be implored that the Indian industry, experts and commentators to be more forthright in their analysis of policies and not hold back for fear or favour in expressing the ideas and views on anti profiteering. Indian industry has never had the spine to speak up, economic liberalization or otherwise. The very idea of creating a new government body to monitor prices is retrograde. Commentators and policy analysts need to speak out against this vehemently and ensure India is not saddled with yet another regulatory “authority”.

CAG Comment on anti – profiteering

CAG also initiated one study report titled as “Implementation of Value Added Tax in India – Lessons for transition to Goods and Services Tax – A Study Report” on the transition of Sales Tax to VAT and observed: “Besides weak monitoring also hampered ensuring that the reduction in rates of taxes showed up in the prices of the commodities and the benefit reached the desired beneficiaries (common man). A Study found that 13 manufacturers did not reduce the maximum retails price of the goods despite sharp decline in the rate of tax. Consequently, the benefit of Rs. 40 crore was illegally retained by these manufacturers and the dealers in VAT chain instead of passing on to consumers. The CAG report highlighted that tight monitoring is required if the government actually intends to provide benefits to the masses. The following questions must be addressed through research with conclusive evidences:

a) What are the category of goods and services where rates were brought down.b) What were the prices before transition to GST on monthly basis for each of the month for the last one year

The CAG report highlighted that tight monitoring is required if the government actually intends to provide benefits to the masses. The following questions must be addressed through research with conclusive evidences: