Pegged as the most sweeping tax reform exercise the country has ever seen, the ambitious Goods and Services Tax will come into effect in India at the stroke of midnight on June 30. Among the many challenges that the new tax regime, also dubbed as the biggest economic reform witnessed in the country after the liberalization of 1991, is the concern over the new anti-profiteering rules put in place by the government to ensure that businesses pass on the benefits of the GST to consumers.
The new rules have sprung up apprehensions, especially because they entail cancellation of the registration of those businesses or entities which are found in the wrong. The criticism has been sharp, with some dubbing the rules as ‘draconian’ and reminiscent of Inspector Raj. Others have been a little sparing in labelling them ‘half-baked’ as the rules are yet to be notified. In either case, it is safe to assume that there are widespread concerns over the threat tactics and that they are not entirely misplaced.
Let us go step by step to understand what these rules mean to get a better understanding of the apprehensions. The government on Tuesday released anti-profiteering rules under the Goods and Services Tax regime that provide for cancellation of registration of any entity or business if it fails to pass on the benefit of lower taxes or input tax credit to consumers in a commensurate manner. Input tax credit, under the GST, effectively means that you can claim input credit for taxes paid by you on purchases. In simple terms, input credit means that you can reduce the tax you have already paid on inputs at the time of paying tax on output.
For example, if your total payable tax on the final product is Rs 500 and you have already paid Rs 200 as tax on the purchase of material that went into making the final product, you can claim this relief in your final tax, making the payable amount Rs 300. This applies to manufacturers, suppliers, agents, etc. registered under GST.
While a sunset clause of two years has been inserted, there is a three-step period that has been provided for the entire exercise. The process involves verification of the complaint by a standing committee of officers. If there is merit in the case, it will be investigated by the director general of safeguards. Based on the report submitted, the authority will decide the quantum of punishment. The entire process will take eight to 11 months.
The worries over the new rules laid down by the government under the Goods and Services Tax are extensive. For starters, it has skeptics going on whether the rules mark the return of the dreaded Inspector Raj reminiscent of the yesteryears. In fact, ‘profiteering’ actually stems from the Nehru-Gandhi era when the government used to act against hoarders in times of food shortage. The government has announced the setting up of a National Anti-Profiteering Authority to deal with complaints. The authority has the powers to penalize as well as cancel registrations of the offending entities. The body will be headed by a retired high court judge or an Indian Legal Service officer of the Additional Secretary rank or above.
Critics believe that such powers to the NAPA may result in a force akin to a supercop with huge powers. Experts are questioning how the formation of this all-powerful body does not amount to the rebirth of similar bodies that were replaced with the creation of ombudsmen such as the Competition Commission of India and the National Pharma Pricing Authority of India. These authorities were done away with for a purpose, one that the government appears to be overlooking.
The government has so far maintained an image of being business-friendly. Tax experts, however, see the anti-profiteering rules under the GST as restrictive and too harsh on businesses. "The current mechanism is too broad-based and difficult to implement. Can you act against an eatery in Mahabalipuram that does not pass on the gains of input tax credit," a tax practitioner from a global consultancy has been quoted as saying in the TOI. Moreover, the law would be applicable to all businesses irrespective of their nature or revenue. Since businesses are already struggling to brace for the 1 July deadline, tax experts say it would have been better if these provisions were restricted to those having oligopolistic markets or ones where a significant inflationary spiral is expected due to GST.
“The concern at this point in time is whether the sweeping provisions provided in the law can be effectively enforced without affecting business confidence. Also, every reduction in tax rates or increase in input tax credit may not lead to a corresponding reduction in prices as there could be simultaneous upward movement of costs of raw material or forex swings,” Mint quoted M.S. Mani, senior director (indirect tax) at advisory firm Deloitte India as saying.
Consultants also fear of a regime where witch-hunt and misuse may become a norm and the businesses being targeted may end up spending a considerable amount of time explaining things repeatedly.
Significantly, the rules released today make no mention of a timeline for the implementation of the law. Also, there is no mention of whether the mechanism for implementing anti-profiteering measures will be product-based or entity based. The rules only talk about the composition of an anti-profiteering committee and that it has the power to determine the methodology and procedure.
What the FM says
For what it’s worth, the government itself sees these rules acting as a deterrent and not more. On Tuesday, Finance minister Arun Jaitley said the anti-profiteering clause is transient and should act as a deterrent. "I hope we are not compelled to use it," he said. However, Jaitley clarified that the government will not blink on rolling out the GST from 1 July, emphasising that businesses cannot give any excuse for not being ready as enough time was given to them for preparation.
However, implementation of the GST, which will unify more than a dozen separate levies to create a single market, may result in "some disruption" and "technological glitches" initially as traders and the smallest of businesses will have to file returns online, he said.