GST Council: Control raj mindset

| Updated on June 24, 2019 Published on June 24, 2019

The Council should not have extended the tenure of the National Anti-Profiteering Authority

More than 25 years after reforms, the GST Council seems to have forgotten that profit is not a bad word. By extending the tenure of the National Anti-Profiteering Authority which ends this November by another two years, the GST Council has reinforced fears of tax harassment of businesses. It does not help that the NAA rules allow for intrusive behaviour, by allowing the complainant or “interested party” to be ‘other’ than the supplier or receiver of goods and services. What’s worse, profiteering is not clearly defined. The rulings of the NAA — it has passed 65 orders in two years, establishing ‘profiteering’ of over ₹600 crore, of which nearly half has been deposited with a consumer welfare fund — are, therefore, potentially open to being contested because of conceptual ambiguities. The NAA is focussed on ensuring that “the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit has been passed on...to the recipient by way of commensurate reduction in prices.” With the GST Council offering an option in some sectors such as real estate to ‘pay 5 per cent GST without availing of input tax credit’, profiteering cannot be established. In fact, the choice of ‘5 per cent sans ITC or 12 per cent with ITC’ creates confusion for all stakeholders. Besides, calculating the tax benefit to be transmitted when the rates are altered can be a very cumbersome exercise. Above all, it is a fallacy to expect a mechanical transmission of a tax reduction, without taking into account other factors such as input prices and quite simply, market signals.

The Competition Commission of India is perhaps better equipped to judge and check anti-competitive practice. While input prices are a better parameter than taxation rates to determine ‘profiteering’, the ground rule to be applied here is to allow free and fair play of market forces, and prevent oligopolistic practices so that the consumer benefits. While it is to be expected that the initial introduction of GST leads to an increase in prices, this fades out once the new system falls into place, provided competitive forces are strong.

Instead of obsessing over transmission of tax cuts, the GST Council should study the impact of high rates on tax avoidance. For instance, an 18 per cent GST rate on construction sector items would force many units to declare themselves as being below the turnover threshold of ₹40 lakh, with the consumer too unwilling to shell out extra. Lower rates are likely to disincentivise tax avoidance practices in fragmented sectors that operate on thin margins. The fact that the NAA needs to settle 350 pending cases, is too flimsy a pretext to extend its tenure by as much as two years. The moot issue is the NAA is not a great idea.

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Published on June 24, 2019
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