29 Jun 2017 15:52 IST

Unease over GST’s anti-profiteering clauses

The Anti-profiteering Rules do not spell out how the benefit from input credit is to be computed

The anti-profiteering provision was for the first time inserted in the draft GST law in the November 2016 version. The trade and industry were eagerly waiting for the anti-profiteering rules to be released by the government.

The GST Council in its meeting on June 18, 2017, finally announced that the rules have been cleared. The expectation was that the trade would exactly know what one is required to do if one has to be GST compliant from price perspective. But unfortunately, there is still no clarity.

As has been observed in advanced countries when GST was introduced, the economies witnessed inflation. In order to avoid this and also to impart consumer confidence, that prices of goods will not increase, the government brought in the concept of anti-profiteering in GST.

GST is expected to bring benefit to businesses by way of increased credits and elimination of cascading effect, that is, tax on tax. The anti-profiteering provisions provide that ‘any reduction in rate of tax or any supply of goods or services or the benefit of input tax credit shall be passed on by way of commensurate reduction in prices’.

This piece of legislation was announced way back in November 2016. However, no methodology of computing the benefit was prescribed.

Then and now

When the GST Act became final early this year, it provided that the Central Government, on recommendation of the Council, may constitute or appoint an authority to examine whether the input tax credits availed by any registered person or the reduction in the tax rate has actually resulted in a commensurate reduction in the price of goods or services or both supplied by him.

Yet no procedure was prescribed as to what businesses should do. The questions which required answers were — how will businesses compute the benefit resulting from increased credits and reduction in rates? Will it be calculated at a company level or product level? Will it be a net profit or gross profit? Can I add additional expenses which I am required to incur due to GST while computing the cost and then arrive at the benefit?

Finally the day arrived when the draft Anti-profiteering Rules, 2017 were released. Sad to state, there was really nothing which trade and industry could discern other than the fact that if post investigation it is determined that indeed profiteering has taken place, there are penalties which could be levied and the GST registration could be cancelled.

Draft rules, spanning six pages, mention the constitution of the National Anti-Profiteering Authority, Standing Committee and State level Screening Committee. It specified the time frame by which the investigation is to be completed.

Price reduction not defined

Further, the rule merely stated that the authority may determine the methodology and procedure for determination — whether the reduction in rate of tax on supply of goods or services or the benefit of input tax credit has been passed on by way of commensurate reduction in prices.

It is imperative to mention here, that term ‘commensurate reduction in the price’ is not defined or discussed in the Act or draft Rules. The establishment of an authority and the power to make its own procedures, is apparently a means to determine whether the commensurate reduction has actually happened or not.

The authority will be more of redressal forum. In the absence of a definition or guidance on ‘commensurate reduction’, the industry will follow its own economics to determine the commensurate reduction in price of goods or services. Will that give rise to discretionary exercise of power by the tax authorities?

As the GST will go live from July 1, 2017, it would be extremely important for businesses to calculate the ‘commensurate reduction’ and revisit the price of goods or services supplied by them.

The Government should release some guidance regarding methodology, including calculations and periodicity, to reflect such commensurate reduction, before GST is implemented from July 1, 2017. The release of clear guidance will help the industry to comply with the anti-profiteering provisions.

(The writer is Partner-Indirect Tax and GST at PwC India. The views are personal. The article first appeared in The Hindu BusinessLine.)

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