The GST anti-profiteering ‘weapon’

The very idea of creating a new government body to monitor prices is retrograde. Photo: AFP

The very idea of creating a new government body to monitor prices is retrograde. Photo: AFP

4 min read

May 25,2017

Praveen Chakravarty

This new ‘weapon’ in the arsenal of the Union government has been designed and launched as part of the Goods and Services Tax

We expect companies to cooperate. We hope we don’t have to use the weapon”. This was the threat issued by Hasmukh Adhia, India’s revenue secretary (“GST: Hasmukh Adhia warns industry against hiking prices arbitrarily”, The Indian Express, 20 May). Adhia was demanding “cooperation” from corporate India on pricing of their goods and services after the implementation of goods and services tax (GST). In other words, he implied that the pricing of goods and services should be in compliance with the government’s expectations. If companies failed to comply, he warned that the government has a weapon to unleash on them—the “anti profiteering” clause. This new “weapon” in the arsenal of the Union government has been designed and launched as part of the GST Bill. The government can now create a new “Authority” which will decide whether businesses have reduced their prices “enough” when there is a reduction in the GST rate of a particular good or service.

Let’s play this out. Today, a ghee dosa at a popular restaurant in New Delhi costs Rs160. The same dosa in the same chain in Chennai costs Rs80. GST rates of ghee are now fixed at 12%, which is a reduction from the current 12.5% tax for ghee in Delhi but an increase from the current 5% in Chennai. But GST rates for services in an air-conditioned restaurant are 18%, down from 22% in both the states.

So, as per the government’s“expectations of cooperation”, this restaurant should now drop its price of ghee dosa in its outlets in Delhi and the quantum of this price decrease should be a precise weighted average of the GST rate reductions of half a percentage point for ghee and four percentage points for service tax. Ostensibly, an officer from the new “Anti Profiteering Authority of India” will now do this calculation and inspect the restaurant in Delhi to check if the price of ghee dosa has indeed been reduced by this amount.

This is the weapon the government has threatened to unleash, if goods and service providers fail to comply. It is a bit unclear if the government also expects the Chennai outlet of the restaurant to match the revised price of ghee dosa in the Delhi outlet under the slogan of a “one nation, one ghee dosa, one price”

India is on the threshold of capsuling down hundreds of different tax rates of thousands of goods and services across 36 states and Union territories into just five tax rates. This is an extraordinary achievement, in the backdrop of stark economic, political and social disparity of the different states of India.

There is much consternation among policy analysts and economists over multiple GST rates rather than just one rate for all goods and services. Poetic as it may have been, a “one nation, one tax” was never possible in a diverse and complex federal polity, such as India. Multiple taxes were inevitable to assuage India’s 3-3-3 paradox—the three richest states being three times richer than the three poorest states.

Instead, what should enrage economists and commentators is this potential throwback to the 1960s. Phrases such as “anti profit”, “authority”, “expect cooperation from businesses”, “weapon”, etc., bandied about in public by one of India’s senior most bureaucrats, is unbecoming of a nation that just celebrated its silver jubilee of “economic liberalization”. The last time India had an anti-profiteering legislation was the West Bengal Anti-Profiteering Act of 1958.

To be sure, India is not the only country to conjure up an anti-profit legislation. Malaysia tried an anti-profiteering and price control law in 2011, ahead of its GST roll-out. It turned out to be a disastrous move which was counter-productive and finally abandoned. Lest this be misunderstood as some paean for efficiency of free and unfettered markets, I readily admit that India is more prone to price gouging and cartelization than most other developed nations. The fears of Adhia and the GST Council of collusion among businesses to not pass on lower prices to consumers may well be justified. There may certainly be a need to supervise, oversee and regulate such unruly behaviour by corporate India. But why create yet another new government body when India already enacted a Competition Act back in 2002 and created the Competition Commission to regulate precisely such behaviour.

The Competition Commission with a mandate to protect the consumer from industry cartelization has been fully functional for eight years now and has earned a good reputation for itself. Rather than create yet another regulator, the GST law could have merely conferred referral powers to the GST Council to refer suspicious cases of price hoarding to the Competition Commission. It is not hard to imagine how officers of this new “Anti Profit Authority” can raise arbitrary objections to what they deem is a “fair” price of a certain good or service after a GST reduction and threaten to levy penalties.

Chief economic adviser Arvind Subramanian, in a recent lecture, implored Indian industry, experts and commentators to be more forthright in their analysis of policies and not hold back for fear or favour. Indian industry has never had the spine to speak up , economic liberalization or otherwise. The very idea of creating a new government body to monitor prices is retrograde. Commentators and policy analysts need to speak out against this vehemently and ensure India is not saddled with yet another regulatory “authority”.

Praveen Chakravarty is a senior fellow at IDFC Institute, a Mumbai-based think tank.

Leave a Reply

Your email address will not be published. Required fields are marked *