By Invitation. Bridge the gap on GST price control

The implementation of GST in India marks a giant leap towards a simplified indirect tax regime, replacing multiple inefficient indirect taxes and levies.

An important measure is the price control mechanism introduced under GST by way of an anti-profiteering clause. This clause seeks to mandate companies to pass on the benefit of input tax credit and/or reduction in GST rates to customers by way of a proportionate reduction in prices.

Without giving any more details on the intent, object and mechanism, the provision seeks to set up authorities to monitor and determine whether prices have been adequately reduced by companies in order to pass on benefits. The intent of price control is certainly noble as it seeks to contain inflation. However, there are many gaps for businesses to be able to give effect to the intent behind the clause and implement it fully.

While the Cabinet recently approved the formation of the National Anti-profiteering Authority (NAA) which will specifically take steps towards price control, including levy of penalties and cancellation of GST registrations, there is no news on the method to be followed by businesses to re-calibrate prices for passing on benefits.

For starters, it does not appear to address the concern of whether the proposed price reduction has to be done in comparison with the earlier tax regime.

Under GST, there has been a substantial increase in credit base for all registered taxpayers, with many service providers facing a reduction in net output tax liability.

However, contrary to anti-profiteering, many companies increased their prices before GST was even implemented.

Another school of thought is that since the provision fails to draw reference to the earlier law, anti-profiteering will strictly apply only under the GST regime.

Apart from this, clarity is also required on whether profit tracking has to be done at a product level, division, branch or an entity level.

This is especially relevant with the recent reduction in GST rates of over 200 products, as it would be covered under anti-profiteering.

An important point to be noted is that different industry sectors may have different methods of calibrating prices under GST. So, administering a simplistic anti-profiteering provision in a blanket fashion may not work.

Questions could arise on the period during which this benefit needs to be passed on to end customers, whether the price reduction is temporary or permanent; if temporary, then whether it applies to the first 100 supplies or in the first six months or whether it needs to be equalised over a year or more? A subsequent question could also be on a periodic review of pricing as the prerogative of the taxpayer.

In fact, our version of the GST law seeks to draw inspiration for implementing anti-profiteering from countries where price control measures under GST have already been implemented, for instance, in Malaysia and Australia.

The Australian Competition and Consumer Commission (ACCC) introduced guidelines that provided a shield to the industry by recognising that legitimate cost incurred for complying with the new tax regime can be recovered by the industry. This would be a good point for the NAA in India to ponder over.

In Malaysia, the Malaysian Price Control Act, 2011 was formulated to enforce anti-profiteering measures. For price control, the net profit margin before and after implementation of GST was compared to arrive at the incremental difference leading to unreasonably high profits.

Given the global experience, the government can strategise efforts for implementing anti-profiteering measures by adopting any of the following mechanisms:

Net profit margin mechanism which compares pre-GST and post-GST net profit margins; or

Cost mechanism which weighs increase/decrease in prices corresponding to change in procurement costs; or

Increase/decrease in prices on account of change in tax rates in the overall supply chain.

The GST Council should ensure that the measures do not cripple existing business operations.

The writer is Partner, Deloitte India. (With inputs from Shreya Tripathi, Senior Manager, Deloitte India)

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