What is anti-profiteering?
Anti-profiteering has been among the key concerns surrounding the onset of the Goods & Services Tax (GST) regime. Anti-profiteering is a clause inserted in the GST Act (Under Sec 171) to ensure that traders/ companies pass on the benefit of lower taxes under the GST to the end-consumer.
Broadly stating the impact in numbers, Bangalore-based chartered accountant Anshuman AS, elucidates via a numerical example, “If all these days, what I bought was subject to a value-added tax (VAT) of 14.5% and it has now been reduced to 5% under GST, the trader (company) has to ensure that he gives me a discount of 9.5% (i.e. the differential).”
The GST benefit that the trader/ company passes on to you arises from the ‘input tax credit’ availed by him (for more details on input tax credit refer to our articles — “Input Tax Credit to Benefit End-customer” and “Will GST Really Spike Up Your Bills?” in our June 2017 issue).
What does the law say?
Section 171 of the GST Act echoes the above point— “Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices”. The law also facilitates the setting up of an Anti-Profiteering Authority (notified by the government and likely to be set up by mid-August), which can impose penalties on players who do not pass on the benefits from input tax credit to consumers.
However, the moot point is whether the average consumer will be able to identify any sudden increase in prices? It is difficult to estimate, say experts. “Usually, existing bills do not declare the VAT collected. If you purchase a plastic bucket from nearby plastic shop, you would never the tax charged. For each and every item, you can’t compare tariffs. In most cases, the trader will show his 14.5% pre-GST bill and charge 3.5% more for the product, if the product is now classified under the 18% slab,” said Anshuman AS.
Asked whether the provision to limit the life of the anti-profiteering provisions to two-years is a drawback, Anshuman added that anti-profiteering laws were transitory. “We are not talking about anti-profiteering in a communist way. All problems of shifting from VAT/excise duty to GST will be completed in two years.”
Profits are subjective
Overall, experts believe that the notion of profit/ profiteering or an increase/ decrease in prices post the GST is a subjective matter. Given that it is difficult for the average consumer to identify the exact tax break-up, companies may decide to hold prices or not pass on the benefit.
“For a product priced at Rs 100, different firms may seek different profit margins. While the GST has reduced the tax burden for most goods, it depends on the company as to whether it passes on the benefit lower tax rates, depending on the price elasticity for their product,” said Saurabh Gupta, CA, Gupta Saurabh and Co. In some cases, firms may choose to keep prices unchanged in order to make good on earlier losses, he added.
Competition will level field
The answer lies in competition, especially so in case of fast-moving consumer goods (FMCG) and other daily essentials, where the presence of substitutes will force traders to pass on benefits (if any) from a lower tax rate. "Moreover, stringent action from the government’s end will prevent companies from making exorbitant profits. The market will bring in a correction automatically, by weeding out companies who do not pass on the benefits of GST,” said Gupta.
A few days after the GST kicked in, the government clarified that manufacturers and vendors will have to print revised Maximum Retail Price (MRP), next to the old MRP, post Good and Service Tax (GST) rollout on stocks that are unsold up to July 1, or will risk legal action. The practice of featuring dual MRPs will be on until September 30, post which only revised MRPs will be permitted.
Case study – Real estate
Retail goods are another matter, but when it comes to complex items such as real estate, where the amounts involved are large, anti-profiteering assumes bigger proportions. A fortnight prior to the GST’s launch, the government clarified that under-construction properties will face a lower tax incidence under GST. The clarification emerged post complaints that developers were forcing buyers to shell out the entire payment before July 1, 2017, or pay higher taxes on what they paid after July 1.
The above possibility holds true, as earlier, developers did not get any input tax credit on construction materials and other raw materials that they can set of against the service tax + VAT payable to the government. These were passed on to buyers as part of the apartment’s price However, with the government now taxing under-construction properties at 12% (with full input tax credit), it expects that developers will reduce the effective flat cost (by passing the credit they receive on raw materials), thereby reducing the net tax incidence on real estate purchases. Such a move by developers will also nullify the impact of a notional higher service tax rate (12% is 5-6 percentage points higher than the combined incidence of 4.5-6.5% earlier). Thus, if developers do not reduce prices commensurate with the input tax credit they receive, they will end up contravening the anti-profiteering clause, and be subject to any penalty imposed by the APA.
Nevertheless, keep an eye on that next bill you pay!