Unfair intervention

Anti-profiteering authority's term should not be extended

It’s close to two years since the new indirect tax regime, the goods and services tax (GST), was rolled out. But the anti-profiteering authority set up under the GST seems to be hitting its stride by taking on cases of various differing values. Recently, it held that Starbucks had raised the base price of one coffee variant after tax rates on restaurants were cut in November 2017 in such a way that consumers paid the same amount before and after; the authority determined that Tata Starbucks made undue profit as a consequence. It has also moved against at least three large fast-moving consumer goods companies, and is expected to widen its scope to investigate other companies. Another sector that is coming under the scanner of the Directorate General of Anti Profiteering (DGAP) is real estate. The DGAP might investigate as many as 50 large property developers to see if they failed to pass on the benefit of input tax credit. 

It has also been reported that the government has considered extending the term of the DGAP, which is supposed to have a two-year sunset horizon. The government claims this is because the GST council continues to tweak tax rates and so anti-profiteering continues to be required. Meanwhile, the DGAP itself has also expanded the nature of its operation. It earlier depended upon complaints from consumers to initiate an investigation. It appears it now will seek to buy and cancel invoices, determine if there are prima facie questions on that basis, and begin investigations on its own recognisance. As many warned at the time, the creation of a new form of state intervention is dangerous, purely because once a bureaucracy is created it seeks to find plausible reasons to extend its own life and enhance its intervention in normal commercial activity. This is precisely how things have turned out. 

The anti-profiteering authority was neither a good idea in theory nor was it implemented properly in practice. It was poorly implemented because the government did not lay out details on how it would determine that profiteering had occurred — in other jurisdictions that have undergone the transition to a GST, such as Australia, it is specified how the equivalent authority should investigate the net margin on a particular good. But in India, nothing is specified other than the process to be followed. But it is also bad in theory. 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 proper transmission of tax cuts, that is the business of the Competition Commission. Nor does a permanent authority make any sense. A temporary authority might be required because the purpose of the GST introduction was to minimise the effect on the consumer. But all future tax changes cannot be judged on the same yardstick as the initial introduction of the GST. They might not all be meant to lower prices for consumers — other economic goals might be in play. Thus, the stated reason to extend the authority’s term makes little sense. It should be wound up by the scheduled date.