Raw deal

GST Council has gone overboard on anti-profiteering

The first meeting of the Goods and Services Tax (GST) Council under Finance Minister Nirmala Sitharaman continued the healthy tradition of a consultative process, followed in all the previous meetings. On Friday, the Council refrained from taking any decision on rate restructuring and focused more on bringing in stringent norms to check tax evasion. While the much-anticipated proposal for reduction in rates on electric vehicles and chargers was referred to a fitment committee, the contentious issue of a uniform GST rate on lotteries was sent to the Attorney-General. In a signal to taxpayers that it was alive to their concerns, the Council did well by extending the deadline to file annual GST returns for 2017-18 by two months till the end of August and announced that the one-form new return filing system will be applicable from January 1 next year. The in-principle clearance to an electronic invoicing mechanism for business-to-business transactions through a designated official portal was another prudent step.

 
The same, however, can’t be said about the decision to impose a higher penalty on the so-called profiteering by companies. Under the changed rules, if companies guilty of pocketing the benefits of tax cuts meant for consumers do not return the amount within 30 days, they will have to pay a penalty of 10 per cent of the profiteered amount. This is in addition to the requirement of returning the profiteered amount either to the consumer or to the consumer welfare funds set up by the government. The additional penalty would be hard on businesses, specially in the absence of rules and guidance as to what constitutes profiteering. The law does not specifically provide for whether the benefit has to be passed on at a business-entity level or at a product-category level, or at a stock-keeping unit level. This has already led to a series of interpretational disputes involving some of the biggest companies. In other jurisdictions that have undergone the transition to a GST, such as Australia, it has been specified how the equivalent authority should investigate the net margin on a particular product. But in India, nothing is specified other than the process to be followed. It’s strange that the GST Council has opted for tougher measures against companies despite its failure to formulate rules even two years after the GST regime was rolled out.

 
The decision to extend the National Anti-Profiteering Authority’s (NAA’s) life by two more years is also questionable. The NAA, which was earlier supposed to have a two-year sunset horizon, was in any way a bad idea, made worse by poor implementation. In any case, companies should be free to respond to tax changes, particularly complex ones such as the GST, which have multiple conflicting effects on their costs, in a manner determined by competitive dynamics and commercial considerations. If competitive dynamics are weak and do not allow for a proper transmission of tax cuts, that is the business of the Competition Commission. It is anyway unfair to assume that competition would not result in passing on cost reduction from lower taxes. Even if a temporary authority was required in the initial years because the purpose of the GST introduction was to minimise the effect on the consumer, the NAA should have been wound up within its stipulated time.