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Why it is not so good to be a highly profitable company in the times of GST

Why it is not so good to be a highly profitable company in the times of GST

By Jatin Bavishi

“In this world, there is nothing certain but death and taxes” goes a famous adage. The Goods and Services Tax (GST) has been touted as a ‘Good and Simple Tax’ and is hailed as the biggest indirect tax reform in India since the Independence. Policymakers expect that by eliminating the erstwhile tax-on-tax structure, market distortions will be cured and sellers would pass on the benefits of lower overall taxes to consumers via fall in prices. Rather than leaving this on the good faith of sellers, the government has put tough regulations to ensure there are no hiccups.

New rules, stricter punishments

On 7th July 2017, the Centre amended Consumer Protection rules to state that manufacturers would now face a penalty of up to Rs 1 lakh, including jail time, for not printing revised price on unsold and new products. A committee of the consumer affairs ministry has been set up to address consumer grievances on GST and even help-lines have increased to 60 from 14 to address tax-related queries. In another order, starting from 1st January 2018, companies will not be allowed to charge a different price for water, soft drinks, or snacks at premium locations like malls and theatres.

A series of related provisions have also been put in place. The most contentious amongst these is the ‘Anti-Profiteering Clause’. As the name suggests, these rules prevent entities from making excessive profits due to the GST. The National Anti-profiteering Authority (NAA) is to be set up to ensure that the benefits that accrue to entities arising out of reduction in costs are passed on to the consumers. Also, entities that hike rates inordinately, citing GST as the reason, will be checked by this body.

These provisions were included very late in the GST rollout procedure. This was only expected since the immediate battle was politically contentious like deciding rates or extent of compensation. A few stakeholders now fear the excessive regulations might bring back the ‘Inspector Raj’.

Penalising profit, controlling inflation

Many countries that have adopted GST witnessed a spurt in inflation after its implementation. Malaysia was able to avoid a similar surge in inflation by effectively implementing anti-profiteering rules. A formula was laid down wherein profit margins were compared for the pre and post GST levels to find out the effect of the change. A similar mechanism is envisaged in India. However, penalising entities based on margins may itself be problematic. Margin expansion can happen from a better mix of inputs, lower input costs or brand loyalty. In other words, there is a host of other factors, other than falling tax rates, that might increase profits of firms. A cap on the absolute margin might disincentivise genuine cost-cutting measures.

The Indian government is serious about arresting inflation because it knows very well that the RBI would not nudge interest rates until inflation rates settle down at a comfortable zone. A cut in interest rate reduces the cost of borrowing and spurs investment. But, controlling inflation also augments spending on consumption which can itself multiply growth. This latter feature can be essential currently since investment (especially by the private sector) has dwindled and consumption can play a role at least till the investment sector takes charge.

Impracticality of the clause

At this point, it might look like the rules are heavily poised against the producers and sellers. But, it must be pointed out that the government plans to use it as a ‘deterrent’ and not an ‘impediment’. Meanwhile, passing on benefits to customers is only fair. A few economists have suggested that the anti-profiteering clause should be applied on products rather than companies since cornering profits is easier for some products than others. That would ensure better targeting.

We are still in the early days of GST and we will have to wait and watch to see how it pans out. There would inevitably be disagreements over aspects of taxation as it affects everybody in their pockets. Nonetheless, what is evident is that GST would not enjoy a honeymoon period.

Featured Image Source: Visual Hunt

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