The revised model Goods and Services Tax (GST) law has been released by the Government, taking into consideration various representations received from the stake-holders. The revised model law is widely viewed by the industry to be liberal in many aspects, as it has done away with taxability of securities and free supplies between unrelated persons, exclusion of Government subsidies from the definition of consideration, simplification of job-work procedures, capping of tax rates, among other provisions.

The consumers are also given a reason to smile as the revised model law proposes to bring in a price control mechanism (Section 163) to ensure that input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate under GST, have actually resulted in a commensurate reduction in the price of the said goods and/or services. For this purpose, the Government proposes to constitute an Authority or entrust an existing Authority to exercise powers and functions and impose penalty where it finds that the price has not been reduced on account of additional input tax credit or reduced tax rate under GST regime.

Need for anti-profiteering clause in GST law

Countries like Canada, New Zealand, Australia and Malaysia have witnessed a significant increase in inflation for a very short period, after implementation of GST. GST is a multi-stage, consumption-based value added tax which proposes to abolish the cascading effect in the present tax structure. Such change in the tax structure provides room for improved profit margin at every stage of supply chain. Therefore, strict measures are proposed to be implemented to ensure that the benefit of an efficient tax system are passed on to consumers.

In India, it is estimated that approximately 55% of the basket of items in the Consumer Price Index (CPI) will be exempted from payment of GST and approximately 30% of the basket of items in the CPI will be taxed at lower rate of 5%. Therefore, it is expected that the Indian economy may not experience inflationary pressure due to GST implementation. Nonetheless, the Government may leave no stone unturned to ensure that the benefits arising on account of GST implementation reaches the consumers. It is therefore expected that the Government may bring in place a legislation to monitor unreasonable profiteering practices by the registered taxable person, after implementation of GST.

Anti-profiteering clause in other enactments

The concept of price control and anti-profiteering has previously been implemented by the Government of West Bengal way back in 1959 (under the West Bengal Anti-Profiteering Act, 1958), to fix maximum price or rate chargeable by a dealer for items of daily use such as rice, wheat, pulses, spices, edible oil, sugar, paper, drugs and medicines, etc. In 2010, the Act was amended to intensify the drive against dealers who store scheduled items illegally for profiteering. The Act provides for punishment with rigorous imprisonment upto 2 years, or fine or both and also for forfeiture of the stock of goods.

In Australia, the Competition and Consumer Commission (under the Competition and Consumer Act, 2010) was empowered to conduct price surveillance, monitoring and enquiry in relation to goods and services. These activities were undertaken to ensure that the price reduction on account of transition to GST regime is passed on to the consumers. Any violation under the Act would require an assessee to directly compensate its customers. In case the customers were not identifiable, the assessee would be obliged to donate the unreasonable profits to a charity or provide its services for free, for a certain period.

GST has most recently been implemented in Malaysia in 2015. In Malaysia, the price control mechanism on account of GST does not fall under the purview of the GST Act, but under the Ministry of Domestic Trade and Consumer Affairs. The Price Control and Anti-Profiteering Act, 2011 has been enacted to control price of goods and charge for services and to prohibit unreasonably high profiteering by suppliers. The mechanism to identify unreasonably high profit is governed by the amendments brought about to the Act in 2014, read with the Price Control and Anti-Profiteering (Mechanism to Determine Unreasonably High Profit) (Net Profit Margin) Regulations, 2014 (for brevity ‘2014 Regulations’).

The 2014 Regulations have identified a certain period during which any increase in the net profit margin of any goods or services on account of GST implementation is viewed adversely and the following conditions are taken into consideration for determining if profit is unreasonably high:

  • any tax imposition;
  • the supplier’s cost;
  • any cost incurred in the course or furtherance of business;
  • supply and demand conditions;
  • the conditions and circumstances of geographical or product market; or
  • any other relevant matters in relation to the prices of goods or charges for services.

Determination of unreasonably high profit

The 2014 Regulations prescribe formulae for evaluating net profit margin of businesses in Malaysia from 2-1-2015 to 30-6-2016. By applying the prescribed formula, it must be ensured that:

  • the net profit margin from 2-1-2015 to 31-3-2015 does not exceed the net profit margin as at 1-1-2015 and
  • the net profit margin from 1-4-2015 to 30-6-2016 (after excluding the effect of GST and sales tax refunds) does not exceed the net profit margin as at 1-1-2015.

If the net profit margin on supply of goods or services under GST regime exceeds the net profit margin as at 1-1-2015, then the supplier is called upon to justify his prices and profits. If the justification is found to be unsatisfactory, the supplier is issued notice to show cause why penal provisions should not be invoked. Further, if the court finds the supplier guilty, he may face fines and possibly, imprisonment.

The 2014 Regulations has faced criticisms from the industry as net profit margin is determined in absolute numbers rather than on percentage basis, which is generally followed by the trade. It was proposed that anti-profiteering and price control should be undertaken by comparing the percentage markup on goods or services {[(Sale price - Cost price) / Cost price] X 100} and corresponding percentage markup as at 1st of January or April. This proposal was not accepted and the 2014 Regulations were amended, thereby extending the period of determination of unreasonably high profit margin from 1-7-2016 to 31-12-2016 using the existing formulae.

Anti-profiteering clause in Indian context

Unlike other countries, the anti-profiteering clause is likely to be covered under the GST Act in India. A strict interpretation of Section 163 of the revised model law requires a registered taxable person to pass on the benefit of every rupee accruing on account of additional input tax credit or reduced tax rate, to the next level of supply chain. Even the transition provisions under the revised model law (Section 169) proposes to allow the credit of eligible duties and taxes in respect of inputs held in stock, subject to the condition that the person passes on the benefit of such credit by way of reduced prices to the recipient.

It may not be practically possible for a business to have one-to-one correlation between procurement and supply of goods and services, particularly the input tax credits on common input services. It is therefore desirable that the industry makes representation before the appropriate authority, to consider the following points before enforcement of anti-profiteering and price control clauses in Indian GST law:

  • The law should allow an assessee to demonstrate group, division or business vertical wise net margin, rather than for individual goods and services.
  • There should be flexibility for demonstrating profitability in percentage terms and not in absolute value.
  • Any price variation pre and post GST regime on account of additional input tax credit or reduced tax rate alone should trigger penal provisions.
  • Any increase in net margin that arises after adjusting price for additional input tax credit or reduced tax rate should not be viewed adversely.
  • Any increase in net margin for reasons and circumstances beyond the control of business should not be doubted.

Concluding remarks

A registered taxable person engaged in supply of goods and/or services may map all transactions by comparing price variances on account of change in tax structure. The mapping may take into account applicable taxes under the existing laws (Central Excise Duty, VAT, CST, Entry Tax, Service Tax) as well as under the proposed law (CGST, SGST or IGST), keeping other factors constant. Wherever possible, the transaction mapping for goods should be maintained at product level, using the cost accounting records.

A detailed analysis of price change on account of uncertain factors like currency demonetization, inflation, seasonal price fluctuations, etc. and its impact on the company’s pricing policy may also be undertaken to justify increase in net profit margin, if any. It is also advisable that an assessee migrating to GST regime identifies and quantifies input taxes that are not eligible as credit under the present regime. Such data may help assessees to demonstrate why price of their goods and/or services have not been reduced even after additional input tax credit eligibility or reduced tax rate under GST regime.

[ The author is a Senior Associate, Lakshmikumaran & Sridharan, Bengaluru ]