The GST law contains a unique provision on anti-profiteering measure as a deterrent for trade and industry to enjoy unjust enrichment in terms of profit arising out of implementation of Goods and Services Tax in India, i.e., anti-profiteering measure would obligate the businesses to pass on the cost benefit arising out of GST implementation to their customers.
The provisions are contained in the GST law as per following provisions:
Anti-Profiteering Measure (Section 171)
The following is the text of section 171 of the CGST Act, 2017:
- Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
- The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him."
Objective of Anti-Profiteering Measure
Section 171 provides that it is mandatory to pass on the benefit due to reduction in rate of tax or from input tax credit to the consumer by way of commensurate reduction in prices.
Concept of Anti profiteering Measure
While every business would like to earn more and more profits from business, given an opportunity, it is a fact that GST is a new concept being introduced in India for first time and claimed as a major tax reform and that experience suggests that GST may bring in general inflation in the introductory phase. The Government wants that GST should not lead to general inflation and for this, it becomes necessary to ensure that benefits arising out of GST implementation be transferred to customers so that it may not lead to inflation. For this, anti profiteering measures will help check price rise and also put a legal obligation on businesses to pass on the benefit. This will also help in instilling confidence in citizens.
Analysis of Anti-Profiteering Measure
This is a new concept being tried out for the first time. The intention is to make it sure that whatever tax benefits are allowed, the benefit of that reaches to the ultimate customers and is not pocketed by trade.
The power has been given to Central Government to constitute an authority to oversee whether the commensurate benefit of allowance of input tax credit or reduction in the tax rates have been passed on to the final customer.
Sub- section (2) of section 171 of the Act provides for establishment of an authority for an anti-profiteering clause in order to ensure that business passes on the benefit of reduced tax incidence on goods or services or both to the consumers.
The authority constituted by Central Government will have powers to impose a penalty in case it finds that the price being charged has not been reduced consequent to reduction in rate of tax or allowance of input tax credit.
Highlights of Anti – Profiteering Measure (Section 171)
- To be administered by Central Government
- By new / existing authority
- Commensurate reduction in prices
- Due to Input Tax Credit (ITC)
- Due to reduction in cost
- May impose penalty for not passing benefit to customers
- Penalties to be prescribed
Functions of Authority
The Authority under section 171 shall have the following monitoring functions :
- Input tax credit availed by taxpayer have actually resulted in commensurate reduction in price of goods / services
- The reduction in prices on account of reduction in tax rates have actually resulted in a commensurate reduction in price of goods / services.
Anti profiteering Measures Abroad
Global experience suggest that anti-profiteering provisions are only effective if there is a significant lead-in time to allow the relevant authority to educate consumers and businesses as to their respective rights and obligations. The concept of anti- profiteering provision has been perhaps borrowed from Australia which was the first country to enact similar provisions when it replaced a series of inefficient taxes with a GST in July, 2000. The Australian Competition and Consumer Commission (ACCC) was charged with the responsibility of monitoring prices 12 months before the commencement of GST. The ACCC’s focus was on educating consumers and businesses. This included the publication of pricing guidelines, communication strategies for different market segments and 'hot lines' for consumers and businesses to get advice. Education was supported by extensive and sophisticated monitoring of prices leading up to the introduction of GST and in the months immediately following.
Malaysia also introduced an anti-profiteering provision, along with the introduction of GST in April, 2015 but it led to widespread litigation and was found to be administratively difficult to implement.
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 had 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. Countries like Canada and New Zealand have also similar provisions.
Implementation of Provision
It is expected that there will be rules or guidelines for implementation of this provision in relation to who will implement this provision, constitution and business rules for authority to monitor, possible cost audit monitoring, from when this provision will be implemented and how authority will check and implement. Also, penalties, to be deterrent will also have to be determined in interest of customers as well as businesses. It will also have to be ensured that there is no hardship, harassment or undue interference by the Authority. At the same time, businesses are expected to be fair and reasonable as otherwise, market forces would lead to fair price determination in absence of any cartelization or unfair trade practice.
To conclude, it can be said that the anti profiteering provision should be enforced in rare case as a exception, rather than rule and should not become a hindrance in free business environment and as a tool to invite corruption.
By: Dr. Sanjiv Agarwal - April 21, 2017