Anti-profiteering body under GST worries India Inc

The warning by the government against jacking up prices ahead of the July rollout of goods and services tax (GST) regime and subsequent move to set up an anti-profiteering body, most likely under the Central Board of Excise and Customs (CBEC), has caused heartburn across India Inc. There is no clarity yet on the rules and powers of such a body.

The government is working on a simple logic: If a business benefits through lower taxation on goods and services under GST, the consumer should benefit commensurately. How will such a clause be implemented? How will pre-GST and post-GST profits be evaluated to determine if a business has indulged in profiteering? Is the government now getting into fixing prices for products and services? These are some valid questions that corporate India is raising.

Saloni Roy, senior director at Deloitte Haskins & Sells, told DNA Money, "We do not need a provision like the anti-profiteering clause. Competition and market forces anyway keep prices in check." She wondered how the government will calculate pre-GST and post-GST profits and determine whether any profiteering has been done by a business. "What is the mechanism the government will use to determine this? What if profits post-GST are due to other business reasons?"

Ravi Adukia and Saion Mukherjee of Nomura said in a note to clients earlier this week that while the corporates would pass on the direct benefits of GST (like a lower tax rate), they would aim to retain partly (if not fully) the indirect benefits from the saving in logistics costs, streamlining of business processes and the seamless flow of input credits.

Will this qualify as profiteering? The two analysts said that GST laws include anti-profiteering measures and though the government may actually set up an oversight body to check profiteering, "We believe such measures are difficult to implement and would be a retrograde step, similar to price controls, if implemented in haste. First, it would be difficult to assess the commensurate price cuts (due to difficulties in the estimation of the benefits of GST). Second, the government may not have sufficient bandwidth to check/monitor the pricing/profitability of the entire gamut of tax-paying entities. In our view, pricing/profitability would be driven more by industry dynamics, rivalry and competitive intensity than by government directives on price cuts."

Bipin Sapra, partner - tax & regulatory services - indirect tax at EY, said if the intent of the government is to merely ensure that GST benefits are passed on to the consumer, then the industry does not get hurt. "But whatever rule government frames should be objective, clear and transparent."

Binaifer Jehani and Elizabeth Master of the rating firm Crisil said in a note to clients that GST legislation emphasises anti-profiteering measures for companies.

Accordingly, any reduction in the rate of tax on supply of goods or services or the benefit of input tax credit needs to be passed on to the recipient by way of commensurate reduction in prices. "Demand improvement is likely in sectors where such tax reduction will be significant. However, these segments may witness an improvement in demand provided companies pass on the tax savings to consumers."

FINGERS CROSSED

• The corporates are likely to pass on the direct benefits of good and services tax (such as a lower tax rate)
   
• They may aim to retain partly the indirect benefits from the saving in logistics costs, input credit
   
• Demand improvement is likely in sectors where such tax reduction will be significant, experts say