If even govt knows it’s a bad law, why have it? PDF Print E-mail
Saturday, 01 April 2017 05:32
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If the anti-profiteering law won’t be used in cases where there is competition, this must be codified in the law

Revenue secretary Hasmukh Adhia saying the anti-profiteering clause of the GST was likely to be transitory and would be used infrequently is good news to the extent it means the government accepts it is a bad move. Beyond that, however, it makes little difference since, as industry fears, it allows the taxman to question every pricing decision. If a goods or service faces an effective tax rate of 20% today but finally gets categorised in the 18% GST slot, the taxman can argue the 2% difference needs to be either passed on to consumers or given to the government in the way ‘unjust enrichment’ monies are handed over. Apart from the harassment—think corruption—to the taxpayer, the real issue is that prices of goods and services are based on several items, not just on the bill of goods and tax levels. Though both prices of inputs and exchange rates fluctuate significantly during a year, most companies try to keep prices stable, absorbing a cost hike for a while and recovering it later—under the anti-profiteering clause, no such freedom is to be allowed. Though the clause goes down well politically, it will open the doors to tax terror.

Once taxes settle, the revenue secretary is right, there will be no need to use the clause—so, if a good taxed at 20% moves to the 18% bracket, the taxman’s concern is to disgorge the 2%; once rates stabilise at 18%, however, there will be no more case for disgorgement. But, as even the finance minister has made clear, while we are settling for a high-tax GST right now, the rates will probably get lowered over a period of time—as compliance rises under GST, the GST Council will agree to lower rates; implicitly, the greater the increase in compliance, the larger the cuts in tax rates. In a situation where, after a few years, GST rates could come down, presumably the political class will want to use the anti-profiteering clause. In which case, apart from the immediate concern over the discretion the clause will give the taxman, there is considerable uncertainty over how long it will last.

In order to show use of the clause will be limited, the revenue secretary has said that it was unlikely to be used in cases where the goods/services operated in competitive markets since there was little scope for keeping prices high after a fall in the GST rate—Adhia has indicated, in his interaction with the press, that the anti-profiteering clause will be used only in the case of goods/services in monopolistic markets. While the clause remains problematic, industry would breathe a sigh of relief if the GST Council was to codify this and lay down parameters for when the clause would be brought into operation. So, for instance, it could say that any industry which has more than four players—as most competition authorities the world over will affirm, this is enough to make a market competitive—will not be subject to the anti-profiteering law. Experience has shown that taxes and laws, once brought in, are seldom removed—most cesses/surcharges, for instance, continue forever—so it is unlikely that industry is going to take just the government’s word on the clause being benign; despite all the government’s promises, keep in mind, the progress on fixing retrospective tax cases remains poor.


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