Holiness of Profiting vs Villainy of Profiteering
Vishwanath turned to the Business section of the morning newspaper, the caption read “Anti-profiteering measures in GST is regressive”. Words profiteering and profit sounded similar. So he looked into a dictionary.
Profit is merely the excess of sales price minus costs and expenses while profiteering is the act of making unreasonable profit more particularly using unethical means. He understood that profiteering was villainous activity harming certain sections. In short, an outrageous deed.
The question arose in his mind- Why should GST law be having anti-profiteering measures? He called Mr. Prasanna over the phone.
How is Profiteering possible in GST?
Prasanna attempted to explain this.
Implementation of GST, a value added tax system would mean seamless flow of credit in the value chain. This implies input taxes that were considered as costs under prevailing indirect tax laws would become vatable. The cost of the product would reduce. Therefore, prima facie or without considering other factors, this should lead to a reduction in price for the consumer. If a trader in the value chain decides not to reduce his selling price despite having the reduction in cost, then it would amount to profiteering.
Assuming the rate of GST is lesser than the prevailing rates of indirect taxes on a product, then the overall price benefit to the consumer would go up. In other words, the consumer can expect reduced prices.
Vishwanath intervened asked as to why anti-profiteering measure in GST would cause so much dissatisfaction and consternation among the business community. Prasanna replied that the scenario explained above is quite simplistic. In the actual world of business, moving to a new tax regime would imply additional costs in terms of resources like software, investment in knowledge and skill development, restructuring the nature of operations etc. Additional costs would imply pressure on profit margins. One way of absorbing the pressure is by retaining the selling prices.
Thus it is back to the same old quixotic question, whether not reducing prices in such circumstance amount to doing dharma of business ie protecting profits or unholy profiteering.
Prasanna said retaining prices would be possible in short term as in the relatively medium term, any business would be compelled to reduce prices if its competition does so. The market forces would bring down prices.
Anti-Profiteering Clause in draft GST law
Prasanna continued. Now let us come to the actual clause in the GST law. Section 171 of the CGST Bill contains the provision in this regard. In fact, this section comes at the tail end of the law. It is a veritable sting in the tail for the business community.
- The clause requires a registered taxable person to pass on the benefit of input tax credits and reduction in tax rates by way of commensurate reduction in price.
- A duly empowered Authority would be examining the above and if the taxable person is found to be in default, then the Authority can exercise penalizing powers.
Thus, a taxable person is required to maintain elaborate records with detailed computation to show as to how the benefits have been passed on. Many of the business decisions would be called into question. Thus it will add to compliance burden. Further, this exercise would be time-consuming. Since it is time-consuming, it is questionable as to whether the real beneficiaries ie consumers would benefit from this regulation.
Anti-Profiteering measures in other countries
Prasanna further added that countries in Asia-Pacific have had such measures in their laws. Australia and Malaysia have had conflicting results to show.
Malaysia’s experience, as per experts, was far from satisfactory.
Australia had taken up this issue on a more holistic plane by educating the consumers, monitoring the prices well ahead of the date for implementing GST etc. Hence the provision was effective.
Vishwanath thanked Prasanna for the insights. Prasanna hoped that the final law would take care of the concerns of the business community.