GST: anti-profiteering clause may weigh on business, market sentiment

Dated 31st March, 2017

GST bills’ anti-profiteering clause requires businesses to pass on the benefit of input credit or tax reduction to the end consumer by way of a reduction in prices.

After months of discussions and several meetings, four goods and services tax (GST) supplementary bills finally got the Lok Sabha’s green signal on Wednesday. While the seven-hour-long debate was on, concerns were raised on many aspects of these bills—a significant one being the anti-profiteering clause. This clause requires businesses to pass on the benefit of input credit or tax reduction to the end consumer by way of a commensurate reduction in prices.

The objective of this move is to protect consumers from inflation after GST implementation. The implementation of GST has often led to some inflationary pressures in countries where this tax is already in place. But while the objective may sound simple, implementing an anti-profiteering clause is fraught with grave risks.

The biggest challenge, according to tax experts, is that of compliance. The government will have to ask for pre- and post-GST cost sheet of each product and calculate the pre-GST tax rate and post-GST tax rate for each and every item to understand the quantum of tax benefit that a supplier should get.

“There is still no clarity on how will they calculate the profit an organization made, will it be net basis or gross basis, a body will be needed to govern the whole process and for how long and how minutely will they be monitoring businesses to understand whether benefits have been passed on,” said Anita Rastogi, who looks at indirect tax and GST in PwC India.

After all, movement in prices could be due to a host of reasons such as the demand-supply scenario, competition and in certain cases, prices of a commodity in international markets, the level of the currency and so on. Which authority has the means to track all these aspects and conclude whether the prices should be passed on or not, ask tax experts.

“This is just like expecting banks to lower lending rates because the central bank has lowered repo rate; practically, it never works this way; there are lot of other factors that can determine movement in price of goods. For services, this may be easier to calculate and track, but for manufactured goods, it is very difficult,” said Madan Sabnavis, chief economist at CARE Ratings.

However, despite so much ambiguity, the government is pushing hard for the GST roll-out to begin from 1 July. Corporates, especially small and medium enterprises, are ill-prepared as the infrastructure is still not in place to deal with changes that GST would bring along and in such a scenario, going ahead with something as complex as the anti-profiteering clause may lead to a lot of disruption.

“Take the example of Malaysia. GST was implemented there in April 2015. The anti-profiteering clause has been a complete disaster because of lack of preparation,” added Banerjee.

Voicing a similar concern, some economists added that in Australia, GST was implemented in 2000 and companies there were aware a year in advance that an anti-profiteering law was to be implemented; so they had enough time to prepare accordingly and their competition commission was also geared up accordingly. In India’s case, it was only in the second draft in November 2016 that it was announced that this clause would be made mandatory.

What corporates are also worried about is whether the anti-profiteering clause will result in witch-hunting by tax authorities. “The fear among corporates with respect to anti-profiteering is that it gives lot of power to the taxmen who may misuse it and harass taxpayers since a slew of indirect taxes will now be out of window and with that, their access to taxpayers would lessen,” said Sachin Menon, partner and national head (indirect tax) at KPMG India.

To conclude, the anti-profiteering clause is yet another poorly thought-out attempt by the government to micro-manage businesses and may well lead to a bureaucratic nightmare. If implemented, it could have a severely deleterious effect both on business and on sentiment at the bourses.

Source: www.livemint.com