One of the stated objectives of introducing the goods and services tax (GST) is to eliminate multiple taxes, remove cascading of taxes, rationalise tax rates and enhance the spectrum of the input tax credit. This would reduce the incidence of indirect taxes on the products and services.

With such a reduction in the tax incidence, it is expected that the prices of goods and services are reduced. This, in turn, one would expect, would result in consumer benefits handed down from the reduction in the incidence of taxes.

The Price of Profit-erring
The government made its intention clear by introducing an anti-profiteering clause in the GST law to ensure that a commensurate cut in the prices on account of a reduced tax rate, or the benefit of higher input tax credit, is passed on to the consumer. It also proposed to set up an authority to monitor such instances of profiteering.

The prices are mainly driven by elasticity of demand, supply constraints and competition. As pricing is a function of multiple factors, it is difficult to attribute only one factor responsible for increase or decrease in prices. Therefore, the actual implementation of this provision is quite challenging both for business and government.

It may be possible that the incidence of taxes for a given commodity has reduced. However, due to high demand and supply constraints, the prices have increased. Thus, the procedure to be followed by the anti-profiteering authority becomes critical to examine cases where the change in price is on account of incidence of tax or any other factors.

As per the clause, the prices need to be reduced only on account of lower tax rates and higher input tax credit. The issue is whether the businesses that reorganize their supply chains and reduce costs on account of such business efficiency be required to reduce prices.

Can this be covered within the purview of the anti-profiteering clause? And how can such benefits be measured at a unit price level? These remain a challenge.

Also, even if businesses are willing to pass on the benefits to consumers, it may not be practically possible to alter the maximum retail price (MRP) of products lying with retailers and dealers across the length and breadth of the country. Similarly, alteration may also not be possible in cases where such products are governed by the Legal Metrology Act, 2009, as such a law may not permit the alteration of the MRP. The impact of alteration may also need to be examined in cases where the duty or tax is paid based on the MRP.

As is evident from its language, the anti-profiteering clause aims to address the transition issue. However, it is not clear up to what period this can apply. Can this clause also apply to goods that are ’completely manufactured’ and supplied under the GST era? Hopefully, no. However, industry will need clarity on this matter.

Catch-and-Mouse Game
The media interactions after the 14th GST Council meeting in Srinagar on May 18 indicate that the government is working on developing the rules and procedures to be followed for determining compliance with the anti-profiteering clause. It is also in the process of deciding the shape and structure of such an authority.

The government has indicated that it is keeping a close watch on the movement of prices. Once the authority is set up, it can then examine the cases where the prices were increased even before the introduction of GST. In the absence of any specific and clear rules and procedure, industry is apprehensive that such a clause can be a tool for harassment due to the possibility of misuse and subjective interpretation and determination of the commensurate reduction in prices.

Therefore, in order to achieve the objective of reduced prices to consumers, the government should adopt a balanced approach to ensure that honest businesses are not unduly put into difficult situations or come under-litigation. It should also ensure that the anti-profiteering authority does not act as a price regulator in a free and competitive economy. A well thought-through and detailed procedure should be issued by the government to achieve the stated objective of determining the extent of benefit that is to be passed on to consumers.

 24 May 2017, 01:36 PM