NOVEMBER 21, 2016

By Nitesh Kancharla and Krithika Jaganathan

THE overhauling of the Indian system of Indirect Taxation System into the Goods and Services Tax ('GST') Regime has been the focusof the Indian Government in 2016. While the Model GST Law provides for a smooth transition of an entity from the present tax regime into a functioning entity under GST, the Model GST Law is largely silent in respect of any policy machinery for preventive surveillance or protective compliance with respect to price control. In contrast, other Nations that have implemented GST in their economies have institutionalised mechanisms to address certain less-desirable consequences of revamping the tax policy of the Country.

To briefly recount the general impact that such a systemic revamp is expected to have on the economy, several Countries witnessed inflationary trends post the effective implementation of GST, while a few Nations saw its market plagued by unscrupulous business dealings in the ensuant chaos of the mega-transition to GST. On the other end, business entities had reservations about the costs of compliance and its effects on their liquidity, to cushion which they would not pass on the benefits begotten of the GST regime.In anticipation of such unintended repercussions, a few countries implementing GST undertook preventive measures against undue profiteering and set up protective measures on pricing patterns that would unduly affect the ultimate consumer. From the collective experience of other nations implementing GST, it is expected that a two-year time window would be necessary for all businesses and consumers to adjust their price-level changes ensuing from the introduction of GST.

Anti-Profiteering: Malaysia

Upon the introduction of GST, it is expected that businesses would be privy to major savings at the procurement stage itself on account of seamless availability of Credit. However, the benefit of lowered prices for factors of production may not always be passed on to the ultimate consumer. In an attempt to pre-emptively keep inflation in check while also ensuring that the benefits of GST trickle down to even the customer in the consumption chain, Malaysia enacted the Price Control and Anti-Profiteering Act 2011 ('PCAP Act'), which came into force on 1 April 2011 and was made applicable to GST from its effective date of implementation on 1 April 2015.

The Malaysian government's committal to shield ultimate consumers from unscrupulous traders during the implementation of the GST was demonstrated by the passage of the Price Control and Anti-Profiteering Act (Amendment) 2014 which empowered the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) 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.  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 as 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, 11,147 cases of profiteering casesare pending investigation in Malaysia.In addition, the Government of Malaysia released a publication containing a 'Shopper's Guide' of the expected prices of certain goods and services 3 months before the implementation of the GST.

Thus, the Malaysian Government took strict measures to ensure that all the stake-holderswere well-equipped to handle the transition to GST, while also setting in place the necessary safeguards for undue profiteering.As on June 2016, Malaysia 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.

Facilitating the Trickle Down Effect : Australia

As a part of GST transition strategy in Australia (Australia has enacted A New Tax System¹, certain amendments were made to the Trade Practices Act, 1974 (later revamped as Competition and Consumer Act 2010) wherein Australian Competition and Consumer Commission ('ACCC') was empowered to ensure that, post implementation of GST, the benefits of the prices reduction caused by abolition of sales tax and other taxes were passed on by businesses to their consumers.During the transition period, ACCC's duties inter-alia included the following:

*  develop guidelines to ensure thatthe prices charged for regulated supplies were not exploitative;

*  monitoring of prices across a broad range of industries, especially food andrelated supermarket items; and

*  initiate investigations against the alleged breach of anti-price exploitation laws.

Investigations: For the period from July 1999 and 31 December 2001, over 6,500 GST - related matters were investigated by the ACCC and ordered for refund of over USD 14.7m (Peter Hill,  Australian GST Handbook 2009-10² .

Trigger: The following situations enumerate the triggers that constitute sufficient grounds for the intervention of the ACCC:

* Over-charging: A few businesses wouldincorrectly computeGST leviable on products thereby leading to an inaccurate price quotation. A few other business practices wouldlevy GST on prices above the contracted price;which, in direct contravention of contract law as also GST law, would increase the price payable.

* Illegal Levy: In a few situations of rank contravention of legal provisions, businesses would collect GST even on GST -free supplies (zero-rated supplies).

* Where business could not adequately validate and account for the differential amount between prices under the erstwhile sales tax regime and under GST price.

Emphasis is warranted on the fact that, even though the ACCC's role in price-monitoring ceased on the appointed date of 30 June 2002, the ACCC continues to regulate the advertisement sector in respect of falseor 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. In fact, the institution of a Government Agency to supervise, regulate and enforce the changing tax laws was not counteractive to the natural dynamics of the market and market forces at play, whereas the mechanism designed by the Government of Malaysia could still be said to be restrictive to industry and commerce.

Before parting:

Thus, we see different measures having been instituted to ensure that consumers are benefited and the national market is not harmed, one by way of stringent price control and the other by way of mandating transparency in pricing patterns. The machinery instituted by Malaysia and by Australia is accompanied by their inherent flaws, though both approaches validate and reiterate the policy of maximising the tax relief and ensuring that economic benefits percolate to every level.The beneficial policies of a free market economy, and a single rate of taxation for the national market cannot be sustained without ensuring a backbone of compliance and self-regulation at the stage of transition. In August 2016, the Finance Ministry and the Central Board of Excise and Customs were reported to have mooted the idea of introducing such anti-profiteering measures in the Indian economy as well as the requirement of monitoring mechanisms to ensure that the benefits permeate every strata of the society.

It remains to be seen whether clear and proactive measures will be adopted by the Government in India against similar mechanisms instituted in other GST jurisdictions.

¹Goods and Services Tax Transition) Act 1999 and commenced it on July, 9, 1999, almost one year prior to introduction of GST

² Thompson Reuters (Professional) Australia Limited 2009) 10-11

(The authors are Principal Associate and Associate with Lakshmikumaran & Sridharan, Hyderabad and the views expressed are strictly personal)