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Anti profiteering provision in GST

Anti profiteering provision in GST – Is this provision a regressive provision?

1. GST will be all -pervasive with every taxpaying entity under its net. The revised model law is widely viewed by the industry to be liberal in many aspects. It has done away with

  • taxability of securities and free supplies between unrelated persons,
  • exclusion of Government subsidies from the definition of consideration,
  • simplification of job-work procedures, capping of tax rates, among other provisions.

But, The Bills have incorporated an “anti profiteering” provision to ensure that the reduction of tax incidence is passed on to the consumers.The tax paying entities are not supposed to unjustly enrich themselves by pocketing the reduces taxes.

2.        The Bills also give consumers a reason to smile as the revised model law proposes to bring in a “price control mechanism” (Section 163) to ensure that input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate under GST, actually result in a commensurate reduction in the price of the said goods and/or services to the consumers. Perhaps, a laudable objective? For this purpose, the Government proposes to constitute an Authority or entrust an existing Authority to exercise powers and functions and impose penalty where it finds that the price has not been reduced on account of additional input tax credit or reduced tax rate under GST regime.

3.         Strictly speaking in terms of Section 163 the taxable person will have to pass on the benefit of every rupee that he enjoys by way of additional input tax credit or the reduced tax rate. Even for transitional provisions such a clause has been set in (Read Section 169). You want ITC for closing stocks pass on the benefit by way of additional input tax on goods and services. Will it be possible for any business to have one-to-one correlation between procured goods and services, particularly the ITC on common input services?  GST MY TAKE answer is  Perhaps, NO.

4.  The law expects all businesses engaged in supply of goods and/or services to compare price variances on account of change in tax structure for all transactions pre-GST and post-GST regime and this analysis will take into account applicable taxes under the existing laws (perhaps all 17 taxes that are subsumed) keeping all other variables constant. I wonder how is to be done; but it must be done. The prices may have to factor in variations on account of currency demonetization; inflation; seasonal fluctuations; overheads that may impact the pricing policy being followed.  Really a tough one but must be undertaken to avoid notices.

The provision has given power to the authorities to examine and identify if the implementation of GST has resulted in reduction of price of goods or services supplied by the assesse due to availability of input tax credit or reduction in the tax rate and if yes, has this advantage been passed on to the ultimate consumer. If the assesses are not compliant, the authorities have the power to penalise the wayward businesses.

Is this exercise such a simple exercise for businesses to follow?  This measure is not as simple as it appears to be as there is a requirement to announce a set formula which would be followed to conclude that in actual, there has been an increase in profits. Secondly, there would be a requirement to identify the reason for such increase and conclude that the jump is not just due to market forces. Though there is a dire need for the Government to come up with clear rules and regulations for this measure, it would be prudent for the business community to begin documenting their pricing decisions to avoid heavy penalties and have adequate justifications to substantiate their pricings.

5.         Central Government is to constitute an authority to implement Section 163 and this authority shall have omnipotent power to examine whether a given business entity has implemented the intention behind Section 163. How will this be done; who will do it and what shall be the Authority is not in the law at present (as it must be; otherwise the law is subject to challenge  in Courts). The GST Council, therefore, must make appropriate changes in this anti-profiteering provision before the draft can be tabled in the Parliament. The Government should give assurance to the business community that under the garb of anti-profiteering moves, it is not making way for the return of the Inspector Raj!

While the intent of such a proposal cannot be questioned, the industry believes that it will be very difficult to implement and the costs of compliance and administration will significantly outweigh the risks that some businesses will seek to ‘profiteer’ from the change in indirect tax systems. This difficulty is exacerbated by the short implementation timeframe which makes ‘price manipulation’ difficult.

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Profile photo of CA Rashmi Jain CA Rashmi Jain

New Delhi, India

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