The unfortunate consequences of GST anti-profiteering rules

With a chairman for the National Anti-Profiteering Authority in place, the anti-profiteering methodology is the next key thing to watch out for.

An announcement to this effect can be expected in a few weeks, said an Economic Times report, adding that India may adopt a product-specific approach similar to that of Australia to ensure that the full benefit of price reductions due to the goods and services tax (GST) is passed on to consumers.

This means that when the authority gets any complaint, it will examine the input tax credit flowing into a product and the resultant reduction in total tax.

While that sounds simple, just as GST did when it was proposed, enforcing it will be a tall order especially because anti-profiteering has not been a success in most countries where implemented.

Not only has it crimped corporate profitability, but critics say it could result in tax terrorism. It’s no wonder then that businessmen are worried about witch-hunting by taxmen under the garb of anti-profiteering.

Australia, Malaysia, Canada and New Zealand are some countries where anti-profiteering or similar provisions have been put in place. Among these, Australia was the first one to enact it in 2000 and Malaysia in 2015.

In Australia, GST implementation had a three-year transition period from 1 July 1999 to 30 June 2002. During this period, the Australian Competition and Consumer Commission had to oversee pricing responses to GST. It was also entrusted with the responsibility to act against businesses whose price changes were not in tandem with GST rate changes.

The country followed “one dollar” methodology, where if a company is making a dollar worth savings on a product, then it has to be passed on to the end-consumer. Secondly, a pricing rule was also put in place which stated that no price increase should be more than 10%, say tax experts.

Apart from that, in an attempt to check price exploitation, large corporates with revenue exceeding $100 million (around Rs645 crore) could voluntarily submit a signed statement indicating their commitment to comply with guidelines. Also, a national GST price hotline was established to deal with consumer complaints.

In Malaysia, the net profit margin methodology was adopted. The anti-profiteering rules set net profit margin as on 1 January 2015 as a benchmark to gauge whether benefits have been passed on or not. While this worked well in sectors like retail, food and beverages, the overall impact was not very significant, add tax experts.

“Both countries followed different methodologies, but anti-profiteering failed to yield the desired results. Such provision can work only when things like raw material costs do not swing sharply. There are many such variables and they would differ from one company to another, adding to the implementation challenge. In India, though the Council has said it would monitor changes in prices for two years, the investigations may take much longer,” cautioned Abhishek Jain, partner (indirect tax) at EY India.

In Malaysia, the anti-profiteering clause has been a complete disaster given the lack of preparation. On the other hand, companies in Australia were aware a year in advance, but both could not avoid the flood of litigation.

According to some tax experts, the Australian commission considered more than 51,000 complaints, investigated nearly 7,000 matters and obtained refunds of around $21 million on behalf of nearly two million consumers.

In Malaysia, authorities inspected more than 188,000 business premises and investigated around 640 cases within the first month of the GST regime, they added.

India could meet the same fate. In fact, given its more complex GST structure than peers, the number of complaints could be much higher.

Since the movement in prices is also a function of the demand-supply scenario, raw material prices and competitive pressures, simpler anti-profiteering rules and methodology that make it easy for businesses to comply, would help.

If not, then just as in the case of filing GST returns, it’s very likely that it would be mired in a sea of litigation.


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