The GST laws were welcomed into the nation with the hope that they would reduce prices of products and services along with the reduction in burden of the snowballing effect of taxation in India. People were not only anticipating relief from the avalanche of heavy taxation but also reducing the inflation. However, learned economists did not look forward to this as an immediate effect, as they could easily foresee that as a short-term effect of GST, prices would increase as businesses would find loopholes for profiteering out of the reduced tax burdens. As the experience from other countries such as New Zealand, Canada, Australia showcases, the positive effects of GST are predominantly long term and there may be increase in prices as an immediate effect.
It is easy for a businessman to extract benefit from the reduced taxes instead of passing such benefit to the end-consumer. However, this would then defeat the very purpose of GST in India. The surprising gains recovered by ITC due to the GST anomaly, as taxes on cigarettes went down, is a good example. The government later applied, an additional cess to cover-up for the reduction in taxes caused due to ceasing of the cascading effect of taxes.
Passing of benefits to consumers
Section 171 of the CGST Act, 2017, specifies that any benefit availed through extra input tax credit (as against earlier) or a reduction in rate of tax on any supply of goods or services has to be passed on to the consumer commensurately. This Section has been created for preventing undue profiteering by businesses thereby creating an obligation on the businesses to pass on the benefits of GST instead of hoarding it up.
Anti-profiteering Rules, 2017
For the execution of this section the Centre passed the Anti-profiteering Rules, 2017 (“Rules”) which creates the National Anti-Profiteering Authority. This authority shall be responsible for investigating into cases where a business entity is profiteering out of the reduction in taxes. The Rules provide the authority, the power to determine the methodology and procedure to be adopted for determination as to whether the reduction in rate of taxes on the supply of goods and services or benefit of input tax credit has been passed on by the registered person to the recipient by way of commensurate reduction in prices.
National Anti-Profiteering Authority
National Anti-Profiteering Authority is a 5-member committee, headed by a secretary-level officer. According to the press release of the CBEC on July 25, 2017 the GST Council has formed a Selection Committee under the Chairmanship of Cabinet Secretary to identify and recommend eligible persons for appointment as Chairman and Members of the National Anti-profiteering Authority under GST. According to the Rules, the Additional Director General of Safeguards under the Board shall be the Secretary to the Authority. The cases of undue profiteering will be referred to the Directorate General of Safeguards (DGS) who will finish investigation within 3 months and send the findings to the anti-profiteering authority, which will pass an order in another 3-months’ time. The GST implementation committee (GIC) will receive complaints and transfer state level cases to the respective state authorities and those involving smaller amounts will be transferred to the state screening committee. While investigating, it would become necessary for the authorities to investigate into the complete value chain of the alleged anti-profiteerer instead of only investigating selective components of the products or services to avoid use of alternative components to profiteer.
Liabilities of wrong doers
The DGS, has the power to issue summons, conduct investigation and give its findings to the authority. Any company found to be a defaulter of these Rules will be asked to transfer the accrued undue benefit onto the consumers and if such beneficiary cannot be located or identified the authority will require the businessman to transfer the amount to the ‘consumer welfare fund’ within a specified timeline. The National Antiprofiteering Authority can also impose a penalty on the defaulting business entity and even order the cancellation of its registration under GST.
To any well-read ‘GSTite’ Malaysian and Australian scenarios are not unknown. The Indian anti-profiteering laws are similar to the Australian anti-profiteering laws. Both these economic systems tried to curb price-inflation by using different models of anti-profiteering. Austrialia applied the dollar margin rule, while Malaysia applied the net-profit method. The Australian anti-profiteering regulations are commendable for two reasons, firstly because they were one of the first countries to implement GST and anti-profiteering laws; secondly because, a year prior to the implementation, the Australian authorities started creating public awareness and investing into extensive price monitoring.
The revenue secretary, Hasmukh Adhia said, “The anti-profiteering authority proposed under the new Goods and Services tax (GST) regime to investigate only cases of mass impact and not small cases of alleged undue profits”. What we do anticipate is that with the advent of these anti-profiteering rules, there could be an increased number of ‘scams’ being unfolded, if, (as Mr, Adhia says) the Authority investigate into cases of mass impact. Now what exactly comes within the definition of “mass impact” is still under speculation. Upon pondering for a moment over the Revenue Secretary’s statement, we think that the reason mass impact isn’t defined is to prevent or discourage businesses from profiteering within the definition what is “not mass impact”!