Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India

Comparative Analysis of Anti-Profiteering Laws under GST– Lessons for India.

[Ayushi Singh]

The author is a third-year student at National Law University, Jodhpur.

Anti-Profiteering[1] in relation to the new Goods and Services Tax (GST) regime ensures that the consumers reap the benefits of the tax reductions and the input tax credits (ITC) claimed by businesses in the form of reduced prices. The provision has caused a storm of paranoia amongst taxable businesses. The structure of the provision consists of undefined terms like “commensurate reduction” and ambiguities regarding which ITC claims are applicable under the provisions.

Anti-Profiteering Rules, 2017 were notified by the Central Board of Excise and Customs (CBEC), which paved the way for the constitution of the National Anti-Profiteering Authority (NAA).[2] The NAA is duty bound to carry out proper investigations of complaints, identify the aggrieved parties and pass orders against the accused party. Conviction can lead to penalties under the Central Goods and Services Tax Act, 2017, cancellation of registration and orders which direct the concerned party to repay the amount to the aggrieved,or transfer the same to a Consumer Welfare Fund if the aggrieved party is not identifiable.[3]

The NAA has been given the reigns to formulate a methodology which will lay down the foundations for directing how changes in the GST regime will translate into price reductions along with guidelines for implementation of this provision.[4]

Inspiration for Section 171: Failures of the VAT Regime

The qualms created by the roll-out of the VAT and the GST respectively is similar.  The VAT regime made tax-free goods taxable; the introduction of ITC raised questions as to how the benefits could be passed on in the form of reduced prices; and ambiguities relating to translation of tax changes to price changes are the same issues that experts are concerned about presently. The VAT did not have any mechanism in law to crack down on potential profit maximization. Recommendations to create a commission to check price changes were suggested.[5] Unfortunately, the VAT failed to deliver. In a study conducted by the Comptroller and Auditor General of India, the report stated:

“Manufacturers did not reduce the MRP after introduction of VAT despite substantial reduction of tax rates. The benefit of Rs. 40 Crore which should have been passed on to the consumer was consumed by the manufacturer and the dealers across the VAT chain.”[6]

Hence, this provision is an effort by the Government to rectify the mistakes of the VAT and make businesses accountable to their obligation of providing benefits to the consumer. Post GST inflation has been a trend in Canada, Australia, New Zealand and Malaysia; by controlling unreasonable price changes, this provision would help to curb the inflationary trends of the GST roll-out.

On 10 November 2017, the Finance Minister, Mr. Arun Jaitley, declared a reduction in the GST rates of Restaurants from 18% to 5%. However, the failure of restaurants to pass on the benefits of their ITC in the form of reduced prices led to removal of the same.[7] If the government had formulated a methodology to enforce the Anti-Profiteering provisions, misuse of the ITC by restaurants could have been prevented with harsher punishments.

Price Exploitation under Australian GST

The Australian Competition and Consumer Commission (ACCC) was legally entrusted with the responsibility of formulating a methodology for defining price exploitation and creating corresponding guidelines. Price exploitation is the act of keeping unreasonably high prices.[8]

The ACCC formulated the product-specific dollar margin rule, which simply means that if a tax reduction of Rs. 5 takes place in a commodity, this will translate into an immediate proportional reduction of Rs. 5 in the price of the same commodity. No corresponding changes can be added to the GST component of the price.[9]

Collaborative guidelines directed retailers to display changed prices conspicuously or through any other declaration as may be.[10] Awareness camps and educational campaigns worked tangentially to make consumers more aware of possibility of price exploitation. GST price hotlines, websites and information bulletins like “Everyday Shopping Guide” helped consumers remain cautious as to exploitative price tampering.

However, the objective of the ACCC was solely to deter price changes, not control of price levels and profit margins.[11] This stems from the understanding that in a market economy, the forces of competition and demand will fluctuate prices. The post GST inflation and the costs involved in adjusting to GST regime i.e. staff training, accounting software overhaul have to be adjusted into the price of the supplied commodities. A price margin of 10% was formulated to bring these price variables into the methodology.[12] As long as the prices were within this defined margin and justifiable through invoices, documents, etc, businesses were safe from penal action.

Profiteering under Malaysian GST

Profiteering is defined as the act of keeping profits unreasonably high.[13] The Commissioner is empowered to set fixed, maximum and minimum prices of commodities[14] and formulate a methodology to define the tenets of profiteering.[15]

The 2014 Regulations laid down a strict formulaic methodology wherein net profit margins of businesses during a set period could not exceed the net profit margin as on 1 January 2015.[16] These Regulations were strongly criticized: mainly because of reliance on numbers rather than percentages in measurement of profit margins. The strict crackdown on any change in profit margin brought fear of increased governmental control in the market. In an advisory by Deloitte Malaysia, the companies were advised to “not to increase prices at any stage” in order to reduce one’s risk profile.[17]

The 2017 Regulations diluted the procedural strictness and formulaic problems. The amendments decreased the scope of the Regulations to only food, beverages and household goods and changed the formula wherein the profit margin percentage of the same class or same description of goods in a financial year could not be more than the profit margin percentage on the first day of that year.[18] Despite these dilutions, experts in the country opine that the price fixing and control of profit margins are more effective tools of controlling inflation rather than profiteering.[19]

Comparison

  • Australia focused on curbing unjustifiable price changes; while Malaysia focused on curbing any price change through methods of price control.
  • Australia did not attack price levels or profit margins as long as it stayed within the 10% price margin, while Malaysia painted all profit margins as profiteering, hence forcing the businesses to absorb GST expenditure, inflation, etc.
  • Australia followed a product-specific model of translating tax changes into prices, while Malaysia’s approach was company-specific under 2014 Regulations and class and description specific under 2017 Regulations.

Suggestions for CBEC

  • “Commensurate Reduction” must be defined along with a methodology to explain how tax changes and ITC can be translated into price changes.
  • Price regulation must be done rather than profit regulation. Focus must be on regulation of unreasonable price changes rather than controlling price levels.
  • Comments by the CBEC point to leanings towards a product-specific approach to applying price changes.[20] Rules for its proper implementation must be formulated.
  • GST-inflation, expenses of GST roll-out and general effect of market economy must be kept in mind. Like Australia, a price margin must be formulated which gives businesses the opportunity to justify price changes with proper documentation.
  • Education and awareness campaigns through media campaign in vernacular, one or more toll-free numbers, email addresses and call-centres[21] would save consumers from profiteering by suppliers in a monopolistic situation or when operating as a cartel. CBEC website can be used to publish information bulletins and consumer friendly updates.
  • Despite the reduction of GST rates on restaurants, the benefit has not led to reduced prices.[22] The profit margin of products is being increased to make up for the removal of ITC. This is a lacuna that needs to be dealt with by the NAA as the restaurants are not actionable under the provision.
  • Another lacuna is with respect to making sure that gullible consumers are not exploited and made to pay the GST by businesses subject to compensation levy.[23]

Conclusions

The ideals behind the anti-profiteering norms stem from a welfare model of public policy. Lessons must be learnt from the pre-implementation, transition and current experiences of other GST following countries and the failures of the erstwhile VAT Regime. Though the rights of the consumer should be prioritized, the entrepreneurial drive of businesses must not be curbed by over-regulation and strict watch-dog tactics.

[1] Central Goods and Services Tax Act, 2017, Section 171.

[2] Anti-Profiteering Rules, 2017, Rule 3.

[3] Id. at 2, Rule 8.

[4] Id. at 2, Rule 7.

[5]Why panic about what VAT will do to prices, The Hindu Business Line, available at http://www.thehindubusinessline.com/todays-paper/tp-opinion/why-panic-about-what-vat-will-do-to-prices/article2176289.ece (May 2, 2005).

[6] Sthanu R Nair, Leena Mary Eapen, Price Monitoring and Control under GST, EPW, Jun. 24, 2017.

[7] Eating out to become cheaper as government slashes GST rates to 5% for restaurants, Indian Express available at http://indianexpress.com/article/business/economy/eating-out-to-become-cheaper-as-government-slashes-gst-rates-to-5-for-restaurants-4931639/ (Nov. 10, 2017).

[8] Trade Practices Act, 1974, Section 75AU.

[9] The ACCC’s role in preventing price exploitation in relation to New Tax System changes, Australian Competition and Consumer Commission available at https://www.accc.gov.au/speech/the-acccs-role-in-preventing-price-exploitation-in-relation-to-the-new-tax-system-changes.

[10] Id. at 9.

[11] Id. at 9.

[12] Id. at 9.

[13] The Price Control and Anti-Profiteering Act, 2011, Section 14.

[14] Id. at note 14, Section 4,5.

[15] Id. at note 14, Section 15.

[16] Price Control and Anti-Profiteering Regulations (Mechanism to Determine Unreasonably High Profit for Consumer Goods) (Net Profit Margins) 2014.

[17] Taking a look at the anti-profiteering regulations, Deloitte available at https://www2.deloitte.com/my/en/pages/tax/articles/antiprofiteering-regulations.html (Jul. 11, 2015).

[18] Price Control and Anti-Profiteering Regulations (Mechanism to Determine Unreasonably High Profit for Consumer Goods) (Net Profit Margins) 2016

[19] The Anti-Profiteering Act no longer relevant, The Sun Daily, available at http://www.thesundaily.my/news/2017/12/05/anti-profiteering-act-no-longer-relevant (Dec. 5, 2017).

[20] India may adopt item-based anti-profiteering rules to benefit consumers, The Economic Times, available at https://economictimes.indiatimes.com/news/economy/policy/gst-anti-profiteering-rules-may-be-based-on-items-to-benefit-users/articleshow/61811187.cms (Nov. 26, 2017).

[21] The Brass Tacks of Anti-Profiteering provisions in GST, Business Today, available at http://www.businesstoday.in/opinion/columns/the-brass-tacks-of-anti-profiteering-provisions-in-gst/story/260941.html (Sep. 25, 2017).

[22] Restaurant bill still high as eateries hike prices on menu post 5% GST, Business Standard, available at www.business-standard.com%2Farticle%2Feconomy-policy%2Frestaurant-bill-still-high-as-eateries-hike-prices-on-menu-post-5-gst-117111600357_1.html (Nov. 16, 2017).

[23] The Central Goods and Services Tax Act, Section 10.