Days after tax rates of about 178 products under goods & services Tax (GST) were changed, the government could be looking to come out with detailed anti-profiteering guidelines, according to three people close to the development.
The broad idea is to prescribe a methodology to ascertain whether companies are passing on the tax reduction under GST and benefits derived from input tax credits to consumers. The guidelines could come by December first week, according to the people in the know.
Several experts — in the government and tax advisors — have been raising several hypothetical questions around the anti-profiteering clause of the GST. Can a company pass benefits of the recent GST rate reduction on one brand of bodywash to another brand of bodywash? Can the company cross subsidise reduction in GST rates in bodywash to something else it sells, say hair oil?
The government’s reference point for arriving at the anti-profiteering rules is two countries, Australia and Malaysia. The anti-profiteering methodology prescribed by Malaysia focused on product-wise pre- and post-GST net profits of companies. The Australian method focussed on pre-GST and post-GST price changes among other things.
“There are several learnings from the manner in which other countries have dealt with the issue of profiteering. The key being that it is difficult to monitor all sectors and businesses. There is an urgent need for the government to notify the methodology, which would be used to determine cases of profiteering, as businesses will need clarity and certainty in order to plan compliance with the antiprofiteering rules,” said MS Mani, partner, Deloitte India.
In the last few days, most companies have also rushed to tax experts to know how they can pass on the benefits to consumers. Some of the doubts are around whether cross subsidising one product with another will be permitted and the duration in which the benefits have to be passed on to the consumers.
“While the guidelines are not yet out, cross subsidy across product categories may not be permitted. However, companies can possibly pass on the benefits within the product mix, like passing on benefits of one soap brand to another,” said Pratik Jain, national leader, indirect tax, PwC India.
Tax experts say in its current form antiprofiteering norms could be challenged in court if any demand is made. They add that compliance cost of companies should be taken into account while determining anti-profiteering. In Australia and Malaysia, compliance cost is deducted from total benefits to be passed on to customers.
“Complying with regulations would also entail significant activities in the context of the product cost records maintained by businesses as the compliance could be required at product level and not only at entity level,” said Mani.
Legal experts say a company’s net profits have to also be taken into account while calculating anti-profiteering. “Businesses should have their own set of guidelines and workings to show they have made efforts to reduce prices after factoring their costs and regular profit margins. These workings should be based on scientific assumptions,” said Abhishek A Rastogi, partner at Khaitan & Co.
People in the know said the government has formed a five-member National Anti-Profiteering Authority (NAPA) which is required to scrutinise businesses and determine where companies are not passing on benefits to customers. The government is also seeking NAPA officials’ inputs to arrive at a methodology for anti-profiteering.
ET View: Widen Tax Base
The government must allow the Competition Commission of India to probe cases where manufacturers and service providers fail pass on the benefit of a lower tax burden on their supplies to consumers. Malaysia’s experience was not a happy one. The anti-profiteering rule led to litigation and administrative challenges, and India should not borrow from this practice. Widening the tax base will check undue profiteering, and competition will lower prices.