Anti-profiteering rule in GST draft Bill has potential to wreak havoc for businesses

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The GST law contains an anti-profiteering clause that mandates a manufacturer and others in the supply chain to pass on the benefits arising out of input credit and lower taxes to consumers at the pain of penalty. The idea is noble and in public interest but as always the devil is in the details, in fact its lack in the instant case.

GST is an indirect tax which by definition means the incidence of taxation can be passed down the line – manufacturer, wholesaler, retailer etc – till the goods reach the ultimate consumers. Under the central excise law, there was a problem which could not be satisfactorily resolved – who should get refund of excess excise duty. The manufacturers contended that if excise duty was paid in excess due to wrong classification or otherwise, the excess tax thus paid must be refunded to them.

The counter to this was if the excess was refunded to them it would amount to undue enrichment of the manufacturers because they had already passed on the higher tax burden to the consumers through the chain. Therefore if anyone was entitled to the refund, it was the consumer, they said smugly.

The counter to this counter was equally impressive. If it is the other way round, i.e. if there was a short payment of excise duty, the excise authorities always slap a notice on the manufacturer because as far as the excise department was concerned, the assessee was the manufacturer and the buck stopped with him. In the event, they rightly contended if there can be undue impoverishment of manufacturers when the duty was short paid, what was wrong in their undue enrichment.

In 1991, the issue was finally resolved through an express amendment to all both the customs and excise laws – no refund of excise duty would be given unless the applicant proved that he was the one who bore the higher duty.

In its wake, no manufacturer made a refund application because he knew he had no case – even if he made an iota of profit, the presumption would be he had passed on the burden down the line. Yes, the consumer can make the refund application because the buck stops with him but he won’t because he has low stakes like Rs 10 per tube of toothpaste.

In the event, even if the manufacturer made refund application, the refund went to Consumer Welfare Fund. Why should a manufacturer fight for a social cause which does not even make the grade as a CSR (corporate social responsibility) spend?

Now fast forward to GST. The problem remains the same though the issue is slightly different. How would the GST authorities prove that there was profiteering or undue enrichment? Simple. Just ask the manufacturer to show his cost sheet culminating in the sale price including profit. The profit it would be triumphantly declared proves that he had not passed on the input credits and the lower tax to customers.

The government alas has unleashed an 800 pound gorilla which is bound to wreck havoc. It would give enormous powers to the official machinery for harassment. The government should realise that market has the capacity to tame avarice. The manufacturers in a competitive industry would see merit in passing on the lower taxes mainly on account of input credit to consumers.

True this might not happen in an oligopoly or cartelisation-prone industry like cement but the problem needs to be addressed by the Competition Commission and not by the GST authorities.

In the excitement over the paradigm change in the indirect taxes regime, the elephant in the room has been missed by both the commentariat and the media. And the tragedy is the elephant is actually an 800 pound gorilla which could unleash a furious fight between the department and manufacturers who may be constrained to defend themselves howsoever weakly through extra cost audit. After all there is no back to back relationship between price and GST.

Source: http://www.firstpost.com/business/anti-profiteering-rule-in-gst-draft-bill-has-potential-to-wreak-havoc-for-businesses-3339434.html

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