AUGUST 06, 2018

By Debasish Bandyopadhyay

IN an effort to stimulate the Indian industries and in a major relief to consumers across the country, GST Council recommended reduction of GST rates on several products in its 28th meeting held on 21st July, 2018. Furthermore, GST rates have been cut down to nil on sanitary napkins & rakhi & many more products made effective from 27th July, 2018 by issuance of notifications by the CBIC. Now, the said cut back of rates would invariably trigger the apprehension in the trade on the applicability of Anti-Profiteering provision stipulated under GST Act.

In the aforesaid backdrop, let us have a look at the relevant provision of Anti-Profiteering contemplated under the GST Act. In terms of Section 171(1) of the CGST Act, 2017;-

"Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices."

It is abundantly clear that the aforesaid section mandates that businesses must pass on tax rate cuts and cost savings to the consumers. Further, in terms of Rule 137 of CGST Rules, 2017, Anti-Profiteering Authority (APA) constituted under Rule 122 of the said Rules, shall cease to exist after the expiry of two years from the date on which Chairman enters upon his office unless the Council recommends otherwise. Therefore, the power and glare of the Anti-Profiteering provision is very much in force on the said amendments and may be extended its power beyond the period of two years if the Council recommends.

Basically, the theory of Anti-Profiteering is a price monitoring and control mechanism to facilitate benefits to consumers to fend off the upward inflationary impact post-implementation of GST in the country. A pertinent question that may be itching your mind that, is the theory stood the test of time in India?

The idea of anti-profiteering is not new to the country. The West Bengal Anti-profiteering Act, 1958 was enacted to prevent profiteering in certain goods like Rice, Wheat, Pulses, Sugar, Drug and medicines, etc. However, there is no study to corroborate that the said enactment had been effective and worthy in fighting the menace of profiteering to order to defuse the inflation.

Why Anti-Profiteering?

It has been given to understand from the experience of many countries that post implementation of such a big tax reform like GST, there has been marked upsurge in the prices of commodities in spite of having tax credit mechanism in place leading to inflationary impact on the related economies. It was concluded that the supplier was not passing on the benefit to the consumer and in that way pandering in illegal profiteering.

At this point, a relevant question that may arise, is there any study/survey done in Indian context to prove the direct linkage between price controlling exercises with inflationary trends?

Let us move to the other perspective of rationale behind conceiving the idea of Anti-Profiteering into Indian GST. The experience and learnings from the implementation of Value Added Tax (VAT) in the country prompted the Government of India to exercise the interventionist policies to prevent any unjustified increase in prices by the businesses. At the time of implementation of VAT across the country, no price control mechanism was introduced putting wholesome faith in the new system to eliminate the cascading effects of commodity taxation that would help to reduce the prices of commodities spontaneously. However, contrary to the above, study conducted by a Central Agency found that the implementation of VAT has resulted in unexplained increase in prices.

It is significant to note that it has been construed from the aforesaid study that in absence of any price controlling mechanism in place, reduction in tax rates and tax cascading were not passed on to the consumers resulted into such non-reduction of prices of commodities post-implementation of VAT across the country. However, the said observation was made on the premise of presumption of economic conditions which existed at that point in time. Therefore, it cannot be said that the said study had been impeccable to find that the price of commodities were expectedly not reduced due to absence of controlling mechanism because still the said increase in price remains an unexplained phenomena.

Price Control - In Search of Truth

At this stage, it is important to discuss the rationality and effectiveness of price control and monitoring mechanism as a policy in the backdrop of economic reforms. Is price control a remedy for inflation or an economic fallacy?

In fact, price fixing and controlling disrupts the normal laws of demand and supply in any economy and it cannot be the remedy to counter inflation or a method to prevent businesses from undue profiteering. On the contrary, due to lack of clarity, such mechanism may turn out to be counter-productive for meddling in the pricing decisions of businesses by the authorities leading to complete chaos in the trade. Findings based on historical studies revealed that price controls cannot have any impact on the inflationary rates. It is highly unlikely that controls reduce inflationary prospects. The main problem with price control is not their ineffectiveness in dealing with the inflation, the main problem lies in the potentially high costs that controls impose on a free economy. Further, the problem with price control is that it interferes in a harmful way with the determination of individual prices. The policy of price control is a policy which offer no long-term benefits to the economy as a whole. The cost of the controls can vary anywhere from that of a small disruption to that of a major economic adversity.

Another important aspect required to be discussed is the constitutional validity of Anti-Profiteering clause under GST as a price fixing and control mechanism. It is undoubtedly unlawful to collect taxes from a consumer in excess of what one owes to the Government. However, it is another thing to interfere or restrict the impact of tax-reduction to increase profit margin. The Constitution guarantees every citizen the right to carry on any business. Price control basically disturbs the fundamental right of the citizens. Therefore, Anti-Profiteering scheme may have to stand the test of constitutionality in the days to come. So, the truth about the rationality of Anti-Profiteering is still elusive.

Anti-Profiteering - A Daring Act

The objective of Anti-Profiteering provision is to restrain the insatiability of businesses who might dare not to pass on the lower rate of taxes to the consumers under the GST regime. However, a question may arise, how would the Authority come to the conclusion that a particular business is profiteering? The mechanism is still unclear to a big extent on the said issue. Moreover, isn't it a daring or draconian power to debar a business in the early stage of such a big reform in case of default under the said provision!

There needs to be more clarity in Anti-Profiteering rules to curb price hikes arising out of any reduction of tax rates. It is significant to understand that several factors influence the pricing decisions, such as supply and demand conditions, costs and taxes etc. Alternatively, promoting competition is the most tested and trusted way of containing the inflationary impact on the economy. So, it is a daring act or provision introduced by the Government to control the other daring act i.e. unethical profiteering, if any indulged in by the businesses in the GST regime.

Conclusion:

Before parting, it is important to highlight that practical implementation of the Anti-Profiteering provision without uncertainty and without inappropriate scrutiny is a huge challenge before the APA. However, it must be our collective responsibility to raise our voice against any such draconian regulations and its rationality of implementation in the country. Meanwhile, it is hoped that APA would exercise the said provisions with due diligence and responsibility in the coming days.

(The views expressed in the article are strictly personal.)