SEPTEMBER 22, 2017

By Dhananjay Singh, IRS

THE Press Trust of India reported on 13 Sept 2017 that a four-member Standing Committee, comprising tax officials of the Centre & states, has been set up to receive complaints of undue profiteering by any entity registered under Good & Services Tax (GST) - the newly implemented indirect tax regime in India w.e.f 1 Jul 2017. It therefore becomes significant for all the stakeholders & the common man on the street to understand how the anti-profiteering mechanism envisaged in the GST law aims to materialise the benefits of GST accruing to a consumer, business entity or the economy as a whole.

VAT experience in India: The Study Report titled 'Implementation of Value Added Tax (VAT) in India-Lessons for transition to GST' released by the Comptroller & Auditor General (C&AG) of India in Jun 2010 mentioned about several cases of profiteering by dealers by not passing on the benefit of price reduction to the consumers in the wake of implementation of VAT in the country. The above C&AG report after checking the records of 13 manufacturers in a State in three initial months of implementation of VAT found that the manufacturers did not reduce the MRP of the goods despite sharp fall in the tax rate post-VAT implementation. As a learning from the VAT experience, legal teeth was sought to be provided in GST law to check profiteering by businesses when GST is being rolled out in the country.

International experiences: To take care of transitional period when the country shifts from the old indirect taxation system to the new indirect taxation system of GST/VAT, various countries of the world like Canada, New Zealand, Australia have introduced anti-profiteering provisions in the GST/VAT law. The international experience also seems to suggest the need for instituting measures to check profiteering in the wake of implementation of VAT, which prevents cascading (tax on tax) thereby reducing the tax incidence on commodities. The Australian Parliament had passed a very strong GST law concerning consumer price exploitation which was to be enforced by the Australian Competition and Consumer Commission (ACCC).

Indian scenario: GST was implemented to provide for seamless transfer of input tax credit across the supply chain in a more comprehensive manner than the erstwhile VAT system, thereby eliminating cascading of taxes. GST was envisaged not with the purpose of generating more revenue as revenue neutral rate (RNR) was the benchmark for deciding the GST rates. The Fitment Committee under the aegis of GST council aligned the GST rates on the various commodities which were close to their present tax incidence. The Indian Parliament while framing the CGST law had mentioned in the Statement of Objects & Reasons that the anti-profiteering provision aims to ensure that the businesses pass on the benefit of reduced tax incidence on goods or services or both to the consumers. The rationale for India to introduce statutory provisions on anti-profiteering, viz. Section 171 of CGST Act, 2017, is to ensure the passing of reduction in effective tax rates to the consumers in the form of proportionate reduction in prices post implementation of GST. Anti-profiteering provisions also aim to check unwarranted consumer price inflation in the economy on account of undue increase in prices of commodities during the transition phase of GST regime. Section 171 of CGST Act, 2017 is enforceable w.e.f 1 Jul 2017 vide notification no.9/2017-Central Tax, dt.28-6-2017.

The likely reduction in prices of goods & services due to GST is not only beneficial to India but also to its neighbouring country Bhutan. The prices of goods imported from India into Bhutan are likely to fall 0-28%. Therefore, the Royal Government of Bhutan has directed its Ministry of Economic Affairs & its constituent Office of Consumer Protection to ensure that the fall in prices are passed on to the consumers. Even though prices of goods are cheaper by as much as 28% in Bhutan, local traders are reported to selling goods from India at pre-GST rates, thus apparently absorbing the GST margin as their own undue profit.

Applicability of anti-profiteering provisions of GST law:

The different situations in which Section 171 of CGST Act, 2017 & the identical provision in State/UT GST Act will kick in include: firstly, reduction in tax rate post GST; secondly, benefit of Input Tax Credit (ITC) availed by the registered person; thirdly, credit of eligible taxes on stock carried forward to GST regime as per Section 140 of the CGST Act, 2017 which provides for transitional arrangement for ITC. Under the GST regime, embedded taxes are now available as ITC & to that extent GST must be applied to a lower base reduced by such ITC.

Broadly, there are three categories, which may be envisaged, that the anti-profiteering provisions in the GST law intends to prohibit:

a) The registered taxable persons of GST can fulfil the statutory obligations to carry forward the accumulated cenvat credit under the previous taxation regime to the new GST regime post 1 Jul 2017.In this way, those registered persons get the benefit of the transitional credit which will tend to reduce the prices of goods and/or services. Such reduction in prices of goods and/or services should therefore be passed to the consumers of such goods and/or services.

b) When tax rates of commodities has decreased post GST implementation, the prices of those commodities will also reduce. Such reduction in prices should be passed to the consumers.

c) The provision for availing &/or utilising input tax credit (ITC) has been further liberalised under GST regime vis-à-vis the cenvat credit regime that existed in pre- GST era. Earlier cenvat credit was available on capital goods, inputs & input services 'whether directly or indirectly, in or in relation to the manufacture of final products' while under the GST regime, ITC is available to a registered person 'in the course or furtherance of business'.

An example where section 171 of GST law can be invoked by the government is when the builder increases the instalment amount to be paid by the flat allottee in case of an under construction flat, complex etc, on the pretext of leviability of 12% GST as against the apparently lower tax rates in the earlier indirect tax regime. In pre-GST era, central excise duty was payable on most construction material at 12.5%. In addition, VAT was payable on construction material at 12.5% to 14.5% in most of the States, & the construction material also suffered entry tax. The input tax credit of the above taxes was inadmissible for meeting service tax liability of the builder, thus leading to cascading of input taxes on constructed flats & a higher effective tax incidence in reality. But GST regime allows full input credit for offsetting the headline rate of 12% thereby reducing the effective tax incidence.

Another possible scenario of profiteering is likely in cases of units opting for composition scheme under which the said units are neither allowed to charge GST on their supplies to customers nor entitled to any credit of input tax. The Composition rules framed under the GST law mandates that the person registered under composition levy shall mention the words "composition taxable person, not eligible to collect tax on supplies" at the top of the bill of supply issued by him and shall also mention the words "composition taxable person" on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business. Even if the composition dealers are breaching the above provision, gullible customers may pay GST if demanded by such composition dealers. This highlights the significance of proper monitoring & audit of composition dealers & traders through credible & transparent mechanism by the Central Tax & State/UT Tax administration to pre-empt such incidents.

Steps taken by the Government: The Consumer Affairs Ministry in the Government of India vide its letter no. WM-10(31)/2017 permitted the manufacturers or packers or importers of pre-packaged commodities to affix new MRP labels (after incorporating tax changes due to GST) in addition to existing MRP for three months from 1st Jul to 30th Sept 2017. At a recent review of the National Consumer Helpline chaired by the minister Ram Vilas Paswan, it came to light that between Jul 31 to Aug 31, 2007, 4426 calls were received on GST alone. Out of these 4426 calls, about 350 calls were received from consumers complaining about traders who were selling at prices higher than MRP in the name of GST.

Instances have been reported that shopping malls and retail stores are still selling goods at pre-GST affixed labels only. This can effectively be monitored in states/U.Ts by the administrative machinery of the Controller of Legal Metrology. Thus the states/U.Ts have a significant role to play in strict monitoring of prices of goods & services to prevent profiteering during the GST transition phase.

The Way forward:

Consumer education campaigns: As part of the communication strategy, focus must be on educating those consumers most vulnerable to profiteering by suppliers in a monopolistic situation or when operating as a cartel. There are already advertisements in newspapers put out by the government highlighting that if there is an increase in MRP of a packaged product post-GST, then it should be advertised twice in one or more newspapers. There must be a continuation of the practice of holding town hall meetings that propagate the benefits of GST to the small dealers in the mofussil towns & the rural hinterland, as desired by the Prime Minister which he articulated at the 'Rajaswa Gyan Sangam 2017' held on 1 & 2 Sept 2017. Adopting the best practices of ACCC in form of aggressive media campaign in vernacular sensitising consumers about the expected prices of goods & services after the introduction of GST, be conducted across the length & breadth of the country. In addition, one or more toll-free numbers, email addresses & call-centres will enable the common man to reach out to State level Screening Committee which can then filter out the complaints & forward it to the Standing Committee if a prima-facie case of profiteering is made out against the registered person. Thereafter, the Standing Committee shall refer the matter to the Director General of Safeguards (under Central Board of Excise & Customs) for a detailed investigation which will submit its report to the National Anti-profiteering Authority constituted by the Central Govt under section 171 (2) of the CGST Act, 2017.

Computation methodology:

The most important pre-requisite for the transparent & effective functioning of the National Anti-profiteering Authority lies in laying out a robust methodology to identify cases of profiteering that qualify within the set boundaries of the statutory provisions.

Rule 126 of the CGST Rules, 2017 vests the power to determine the methodology & procedure with the Anti-profiteering Authority constituted by the Central Govt under section 171 (2) of the CGST Act, 2017. The guiding principle mentioned in the said rule states that the reduction in tax rate on supply of goods or services or benefit of input tax credit be passed to the recipient by way of commensurate reduction in prices. Investigation of instances of profiteering in supply of services requires more sophistication & detail as compared to supply of goods as different types of services supplied by businesses cannot be directly compared.

The Australian Competition and Consumer Commission (ACCC) pricing guidelines released on 9 Mar 2000 (about 4 months before 1 Jul 2000, the appointed day of GST implementation in Australia), hinges on the primary rule that businesses should not increase their net dollar margins on their goods & services as a result of GST alone. The other key rule was the pricing rule which stated that no price should increase more than 10%. The said ACCC pricing guidelines require that inter-alia no mark-up should be applied to the GST component of price; prices should reflect actual, not anticipated, tax increases & businesses should not take the opportunity to increase the difference between costs and prices in dollar terms (the dollar margin rule).

Net dollar margin=sales price-cost of goods-(operating & selling costs)

It is imperative that when the National Anti-profiteering Authority outlines the methodology & procedure, it should specifically commission monthly & quarterly survey of retail prices to be conducted in representative locations in various zones of India, much like what ACCC had done in Australia.

The National Anti-profiteering Authority may also define what constitutes price exploitation as had been done by ACCC. ACCC had defined a business as considered to be engaged in price exploitation in process of GST implementation if (i) it regulates the supply; (ii) it increases net profit margin by not reducing its prices adequately & (iii) it charges unreasonably high price even after accounting for supplier costs, supply & demand conditions, & exceptional circumstances like long-term non-reviewable price contracts entered by businesses & price regulation prevalent in an industry. Contracts can be inclusive or exclusive of taxes. If the contact entered in a pre-GST era is inclusive of taxes, then it may be re-negotiated to account for the change in tax rate post-GST implementation.

The ACCC successfully used its powers to seek penalties before the federal court for violation of price exploitation provision not only against businesses but also against professionals like lawyers & accountants who apparently aided & abetted cases of profiteering by the said businesses. Also publically 'naming & shaming' of defaulter businesses found indulging in profiteering on social media & print media can serve as a potent deterrent to other businesses who may think of breaching the anti-profiteering provisions.

A demonstration effect can be created amongst medium & small businesses by encouraging big corporates to offer a Public Compliance Commitment (PCC) to the National Anti- profiteering Authority on a voluntary basis. PCC was successfully used in Australia where large corporates of turnovers above 0 million were invited by the ACCC to offer PCC, in the form of a signed statement indicating to the public that the company is committed to comply with the ACCC's price exploitation guidelines.

The businesses need not be apprehensive about any price control by applying anti-profiteering measures leading to squeezing of their profits, rather the anti-profiteering mechanism is aimed at preventing businesses from raking in unreasonable profits by not passing the benefit of reduction in tax rate due to implementation of GST, to the consumers. Thus the anti-profiteering measures forbid profiteering but do not forbid any entrepreneur from making profit arising out of their entrepreneurial ventures.

The small businesses need to be hand-holded especially during the transition phase & any minor upward price revision is more likely to be taken care of by competition & free market dynamics. On the other hand, the anti-profiteering provisions need to be applied in large scale & industry-wide cases of profiteering with necessary safeguards. It is therefore incumbent on the Anti-profiteering institutional structure, Central & State/UT Tax administrations to implement the anti-profiteering provisions fairly & transparently with the highest standards of integrity & probity in the long-term interest of the consumers, businesses & the Indian economy.

(The writer is an Assistant Commissioner (P) in the Indian Revenue Service (C& CE), NACIN, Union Ministry of Finance, Govt. of India & a part-time PhD candidate at IIT Kanpur. He is a Gold Medalist in PGDM (RM) from Xavier Institute of Management, Bhubaneswar. The views expressed are strictly personal.)