1. Home
  2. Business
  3. Anti-profiteering under GST and what India

Anti-profiteering under GST and what India can learn from global experience

Anti-profiteering rules under the Goods and Services Tax provide for cancellation of registration of an entity or business if it fails to pass on the benefit of lower taxes or input tax credit to consumers in a commensurate manner
Parimal Peeyush New Delhi June 30, 2017 19:03 IST
Parimal Peeyush

“Hope anti-profiteering law won’t have to be used: FM”, screamed the front-page headline of The Economic Times on the eve of the launch of India’s historic tax reform. That’s a lot coming from the Finance Minister of a country that is embarking on a journey towards creating a unified market through what the government has termed one of the most historic reforms Independent India has seen. The Goods and Services Tax comes into effect within hours from now and as GST rates, its benefits and impact on household budgets gain centerstage, the anti-profiteering provisions under the new law remain a matter of contention.

“There is already an inbuilt mechanism of anti-profiteering clause (to ensure GST benefits are passed on to the consumer). I hope we do not have to use it. It should act as a deterrent,” the paper quoted Arun Jaitley as saying. While the government has made provisions for businesses by providing full credit for taxes paid on inputs as well as through eliminating the cascading effect of tax on tax, it has also put a strict rider making it mandatory for businesses to pass on the GST benefits to the consumer through its anti-profiteering norms.

From IT-readiness, rates impact to compliance: Top challenges in getting India GST-ready

What the law states

While the government claims that the GST will bring down the prices of goods and services once successfully implemented, it is also expected that manufacturers and service providers may not pass on the benefit to the final consumer. It is with an intent to counter such a practice that the government has put an anti-profiteering clause in the GST law. Clause 171 has been inserted in the GST bill which provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.

While the clause in itself did not cause quite the uproar, the rules released on June 19 certainly did. Anti-profiteering rules under the Goods and Services Tax (GST) regime provide for cancellation of registration of any entity or business if it fails to pass on the benefit of lower taxes or input tax credit to consumers in a commensurate manner. A five-member National Anti-Profiteering Authority, headed by a secretary-level officer, has been proposed in the rules. The authority can order reduction in price commensurate with the lowering of incidence of taxation under GST. It also seeks return of the undue profit earned from not passing on the reduction in incidence of tax to consumers along with an 18 per cent interest, as also impose penalty.

Goods And Services Tax (GST): Complete list of items and their GST rates

Reactions to the rules

The new rules have led to up apprehensions, especially since they entail cancellation of the registration of those businesses or entities which are found in the wrong. The criticism has been sharp, with some dubbing the rules as ‘draconian’ and reminiscent of Inspector Raj. Others have been a little sparing in labelling them ‘half-baked’. In either case, it is safe to assume that there are widespread concerns over the threat tactics and that they are not entirely misplaced.

Another view that has come up in the past few days believes that the National Anti-Profiteering Authority could turn out to be a toothless tiger since it does not have suo moto power and set methodology based on prior preparations. The basis of this understanding is lack of clarity on the provisions.

Goods and Services Tax: How GST will change the way businesses operate in India

Where rules fall short

The government’s notification on anti-profiteering is limited to the way complaints and cases will be handled, but miss out on the crucial "how", "what" and "why" of such rules in practice. For instance, the rules prescribe an administrative framework for administering anti-profiteering and stringent punishments, but miss out on the guidance on what will constitute 'profiteering' in the first place. Rule 7 says that the Authority "may determine the methodology" for determination of whether pricing amounts to anti-profiteering. However, with just hours into the launch of the GST, there is no methodology that has emerged so far, leaving businesses in quite a fix.

With the anti-profiteering rule, the government has sought to allay concerns around businesses not passing on the benefits to consumers, businesses have been left in a bind fearing that lack of clarity on the rules could prove to be a problem of litigation and witch-hunt.

GST: How India’s dual GST model stacks up against other countries

Global Experience on GST

Many countries like Australia, Malaysia, Singapore, Austria, New Zealand, Russia and China have already introduced the GST. If you look at the experience of some of these countries purely from the point of view of its anti-profiteering provisions, they appear to be far ahead. Consider the 2000 launch of GST in Australia as an example where the experience of implementation was among the smoothest in the world. Australia, remind experts, handed over the job of drafting anti-profiteering rules to its competition commission one year ahead of the launch.  By the time GST was rolled out, the Australian commission was ready to launch suo-moto enquiry armed with baseline studies on price and cost behaviour of goods and services, said Anita Rastogi, Partner-Indirect tax and GST of PwC.

In Malaysia, on the other hand, the provisions for anti-profiteering were not part of the GST Act in itself. Instead, they were a part of the Price Control and Anti-Profiteering Act, a different law altogether. The Ministry of Domestic Trade there took on the job of ensuring compliance. India, on the other hand, is believed to have started thinking of anti-profiteering norms only a few months ago. Had India opted for an exercise similar to its global counterparts, the pain points could definitely have been much smaller.

Nevertheless, GST is here and one needs to accept it. On its part, the government admits that shortcomings will be covered as the law progresses. For now, the understanding needs to be that it some GST is better than no GST. Perhaps the learnings of the other countries who have gone through the GST grind, and settled down now, will be imbibed in good time.