Sthir Advisors LLP

Amitabh Khemka, COO

Goods and Services Tax - the anti-profiteering clause

December 23, 2016

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ANTI-PROFITEERING – INTERNATIONAL EXPERIENCE …

Australia

• Speech of Parliament Secretary dated October 20, 1999

• As we are all aware, the Commonwealth Parliament has passed a new tax system that will affect prices consumers will pay for goods and services. Under this new system, commencing 1 July, wholesale sales tax will be abolished and replaced by a goods and services tax of 10 per cent. Although I and most Australians support the introduction of the goods and services tax and almost all businesses will be upfront and honest and not use the new tax system as an opportunity to exploit consumers, the State and Commonwealth Governments appreciate that a minority of businesses might - …. . We must be careful not to suggest that everybody will do this. However, some people may not fully understand the system and some people may not be as upfront as they should be. We must be proactive to protect consumers, especially in the light of the many changes that will occur from 1 July. In conjunction with the Commonwealth Government's legislation, the State Government has drafted this legislation to ensure that price exploitation does not occur. I commend the Federal and the State Governments for this proactive stance.

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… ANTI-PROFITEERING – INTERNATIONAL EXPERIENCE …

Australia

• Australian Competition & Consumer Commission (ACCC)

• After conducting more than 3,000 formal investigations into allegations of price exploitation and misleading and deceptive conduct in relation to post-Goods and Services Tax pricing, the ACCC is generally satisfied with the level of overall compliance to date by business with the GST provisions of the Trade Practices Act 1974

- ACCC Chairman, Professor Allan Fels, December 20, 2000

• However, he warned that ACCC would continue its close scrutiny of price changes especially over the Christmas-New Year period.

• For the period upto December 31, 2001, over 6,500 matters were investigated. The reasons identified were: (i) Over-charging, (2) Illegal levy, (3) Businesses could not adequately validate and account for the differential amount between prices under the erstwhile and new regime

• ACCC's role in price-monitoring ceased on June 30, 2002

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… ANTI-PROFITEERING – INTERNATIONAL EXPERIENCE

Malaysia

• The Price Control Anti-Profiteering Act, 2011 was made applicable to GST regime in Malaysia, on introduction of GST from April 1, 2015

• Any person who, in the course of trade or business, profiteers in selling or offering to sell or supplying or offering to supply any goods or services commits an offence.

• “Profiteer” means making profit unreasonably high

• Initially made applicable for 18 months from January 2, 2015 to June 30, 2016, later extended upto December 31, 2016

• Net profit margin between January 2, 2015 and March 31, 2015 shall not exceed the Net profit margin as at January 1, 2015;

• Net profit margin between April 1, 2015 and June 30, 2016 (after excluding the effect of GST and special refunds of sales tax) shall not exceed the Net profit margin as at January 1, 2015

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ANTI-PROFITEERING – INDIAN EXPERIENCE

West Bengal

• The West Bengal Anti-profiteering Act, 1958 – to prevent profiteering in certain articles in daily use (Rice and rice in the husk, Wheat and wheat products, Pulses, Spices, Edible oil, Sugar, Baby food, Paper, Drugs and medicine, Skimmed milk powder, Kerosene, Fish)

• ‘Profiteering’, with its grammatical variations and cognate expressions, means the sale by a dealer of any scheduled article at a price or rate higher than that fixed under section 3

• Dealer who profiteers – punishable with rigorous imprisonment or with fine or with both and forfeit entire stock in respect of which offence committed

Central Bureau of Investigation

• In 1963, CBI was established for investigation of crimes, including specially important cases under the Defence of India Act and Rules particularly of hoarding, black-marketing and profiteering in essential commodities, which may have repercussions and ramifications in several States; …..

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ANTI-PROFITEERING CLAUSE?

Meaning

• To profiteer is to make an unreasonably large profit, all the circumstances of the case being considered, by the sale to one's fellow citizens of an article which is one or one of a kind in common use by the public, or is material, machinery, or accessories used in the production thereof.

Need

• Generally, increase in inflation is observed after implementation of GST

• GST would abolish the cascading effect prevalent in current tax structure - benefits of GST be passed-on to ultimate consumers

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ANTI-PROFITEERING – MODEL GST LAW

Model CGST /SGST Law (released in November 2016)

• 163. Anti-profiteering Measure

• (1) The Central Government may by law constitute an Authority, or entrust an existing Authority constituted under any law, to examine whether input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate have actually resulted in a commensurate reduction in the price of the said goods and/or services supplied by him.

• (2) The Authority referred to in sub-section (1) shall exercise such functions and have such powers, including those for imposition of penalty, as may be prescribed in cases where it finds that the price being charged has not been reduced as aforesaid.

• 169. Transition provision – Credit of duties and taxes of inputs held in stock

• Entitled to take such credit where the person passes on the benefit of the credit by way of reduced prices to the recipient

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ANTI-PROFITEERING – WHAT BUSINESSES MAY NEED TO CONSIDER

• Validate additional profits / margin after reducing prices towards (additional) input tax credits availed and reduction in the tax rate

Validations / Issues

• Determination of non-profiteering at product / brand / business vertical / geography (State) / company level

• Revisit pricing decisions based on projected / estimated costs, including standard costs

• Claim all input tax credits they are entitled for

• Impact of non-recoverable input tax credits – pre-GST and post-GST

• Claim all refunds that they are entitled for

• Reduction in the tax rate of goods / services procured / acquired

• Reduction in the tax rate of goods / services supplied

• Efficiencies due to GST resulting in reduction of supply chain related costs

• Impact on overall costs due to changes resulting from GST

• Change in profit margins for external / uncertain factors

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