The biggest tax reform in the country is only at a few months distance. As it’s expected to roll out on 1 July, several debates and discussions have been going on in both the houses of the parliament. Goods and services tax is an indirect tax that is expected to take away all forms of existing indirect taxes in the country. It is supposed to reap numerous benefits for all the stakeholders involved, from the manufacturer to the end consumer. However there are speculations that the manufacturer may not pass on the benefits to the consumer. Hence, the need of an anti-profiteering clause in the Goods and Services Tax.
Anti-Profiteering Clause – Clause 171
Profiteering implies making unreasonably high profits in the course of a business activity. Goods that are provided to the consumer pass through many stages before reaching him/her. Changes in the tax structure increases an opportunity to gain profits in the supply chain. Thus the Indian government is set to protect its citizens and consumers from anti profiteering by adding a clause in the new tax bill.
Clause 171 of GST deals with Anti-Profiteering. It states that it is compulsory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of reduction in prices.
It also ensures the establishment of an authority to keep under check its compliance. This provision is in the two bills, the Central GST and the Integrated GST.
Supply and demand conditions, supplier’s cost, other taxes are the reasons of unreasonably high profits by manufacturers and unreasonably high taxes to consumers. To lower the prices, the need for an anti-profiteering clause was felt and according to the government it is necessary for the following reasons:
1. To reduce inflation in the initial stages of GST implementation and to observe patterns of inflation
2. To analyse and control the long term effects of GST
3. To set up an honest pricing policy in order to retain the consumers trust in the new tax regime
4. To examine and analyse if input credits or lower tax rates will actually lead to lower prices of goods for the consumers
Challenges of Anti- Profiteering Clause
One of the major challenges of Anti-profiteering clause of GST is unspecified rules. For valuation and taxes, there is no clarity on rules and regulations. Although only a few months remain for the launch of GST, and although four slab rates-5%, 12%, 18% and 28%,-have been decided, what rates will be applicable on which goods is still an unanswered question. Only when these rates will be decided, then the companies and the industry will be able to decide how their products will be priced. The profit comparison of pre GST and post GST may be influenced due to clause 171. Take, for instance, the free flow of goods and services across states with lower logistics cost and without entry tax. This should not be considered as anti-profiteering as this will increase the profit margin post GST. Penalties and discrepancies may take place as a result of limited time for implementation.
What it means for the industry and business
Companies, especially small and medium enterprises are worried as they are not in a position and do not have the necessary infrastructure to deal with GST. Anti-profiteering clause will have disruptive effects for them as it gives the taxmen the power to misuse the law and harass taxpayers. Also, it was only in November 2016, that the government announced that the anti-profiteering clause will be made mandatory. This gave relatively less time for preparation and may have serious consequences if preparations are not made. In Malaysia, GST was implemented in 2015 but it was a failure as the country was not prepared. In Australia, GST was implemented in 2000, but the country was aware of the anti-profiteering clause a year prior and it thus led to proper preparation and implementation.
Another challenge is compliance. How is the government going to decide tax benefits that a consumer should get? Experts say that the government will have to ask for the cost of every product pre-GST and post-GST and calculate the rate of every item pre-GST and post-GST to calculate the amount of tax benefit that a supplier should avail. This will be difficult considering the lack of clarity and the means to calculate profits made by an enterprise, whether it will be on a net basis or gross basis and which body will monitor the entire process. The time taken to monitor businesses and understand their profits is quite another challenge.
A major questions that figures is who will look after the movement of prices affected by demand and supply, competition, the cost of currency, international markets, etc., and decide if benefits should be passed to consumers.
The implementation of GST has led to inflation in countries where it was implemented. The objective of anti-profiteering clause is to protect consumers from this inflation. While the objective is logical, implementing it comes with grave risks and poor implementation will cause a landslide of business and be a nightmare for bureaucrats. If anti profiteering clause is not effectively put into place, the purpose of GST to provide tax benefits to the consumers will be defeated.