“Government may consider anti-profiteering clause to ensure benefits of GST reach consumers”, screamed a headline in a business newspaper a couple days after the constitutional amendment pertaining to GST was cleared by Rajya Sabha, removing the biggest hurdle for the process to take off. The intent of the government is to save the common man from price escalations that may arise from the passage of GST, some of which can be attributed to profiteering. It is ironical that such a fear should arise when the underlying premise is the promise of a simplified tax regime, and therefore lower cost of compliance, in turn leading to increased compliance and a simpler administration combining the multitude of agencies involved in enforcement.
Let us step back to understand why such a fear should arise in the first place, the hurdles that will prevent this promise unless addressed before the law becomes reality, and what steps can be taken to address this.
- It is a known fact that as taxes get harmonized, the overall taxation impact on some goods/ services will increase, and will reduce on some others, as a revenue neutral rate (RNR) is arrived at. The RNR does not fully factor in the buoyancy in tax collections that is expected to arise (the technology and analytics resulting from GSTN database will enable this), and since it will be primarily decided by a combination of state and central revenue functions, it is expected to err in the favor of revenue. (The CEA panel report has arrived at a rate of 15-16%, while the recommended rate appears to be 18%. Some of the states are pitching for a much higher rate.) The current price in the market is a weighted mix of taxed and untaxed goods/ services, and as they go progressively towards a higher weight of taxed goods/services, average prices will move upwards.One way to address this is to factor in a certain buoyancy in taxes while arriving at the RNR.
- One way to address this is to factor in a certain buoyancy in taxes while arriving at the RNR.
- Different buoyancy can be factored in for different “categories” of RNR – depending on the taxed-untaxed mix of that basket of goods.
- The biggest contributor to this fear is based on the ability of the manufacturing and distribution chain to take input credit for the taxes it has paid. The model law has made input credit availability a combination of so many AND conditions, and so many ways to reverse it later. So, it would be reasonable to expect a business to assume a high probability of inability to actually take credit (at least until the system stabilizes), and treat the taxes paid for input as a cost. Doing this de-risks the cash flow to an extent, with the inherent assumption that any credit they are able to avail will fall straight to bottom line. This will be done initially by those who have the ability to set prices, and are not price-takers. Those who are price-takers will either collude to increase prices, or wait for market prices to move higher, or move out of business.
- The only way to address this is by making input credit easy to avail. (In certain developed economies, this is addressed as an extreme case by not having a tax on sales to businesses, with sales tax being collected on sale to an end consumer). However, a VAT model is better administered with greater predictability of cash flows to the government, and in the GST regime we will look at this.
- A strong argument to simplify the input credit is presented in the Business Line article
- Once the predictability and ease of input credit is established, the same will be factored in the decision to pass the risk of non-availability of credit to the next member in the value chain.
- The problems associated with input credit will spill over to commercial decisions around credit period, and increased working capital requirement for the same business activity will invariably result in higher cost in the value chain.
- The effective imposition of a minimum credit period till the 20th of the next month can be avoided by delinking the credit availability to actual payment. Instead, technology can allow to make credit available based on a committed liability by a supplier, by allowing invoice acceptance and locking on an ongoing basis. Doing this protects the revenue’s interest by forcing the supplier to discharge tax, and prevents the specific invoice from escaping the tax net altogether.
- Rules that reverse this credit subsequently need to be eased, and the business taking the input credit should not get penalized by a reversal for any wrongdoing of the supplier identified at a subsequent stage (unless of course, that business has also colluded in the wrongdoing)
- The tight deadline and the complexity of law requires millions of people in the economy to be upskilled, and millions of businesses to be convinced that it is convenient to comply with the law. Since every single invoice is critical for the chain to work efficiently, even the lowest data entry operator needs to be adequately trained about the repercussions of errors.
- Under the Skill India initiative, adequate effort has to be undertaken to upskill every single executive who is in the chain of filing any artifact (invoice, purchases, return, report etc.).
- Automation with built-in checks and validations will ease compliance, preventing errors. More businesses may find using software more beneficial than trying to manage it manually. Systems enabling automatic invoice capture using EDI or equivalent, and filing and reconciling GST returns seamlessly, will make the process easier for the taxpayer, and can result in overall lower costs.
- With these in place, some businesses may see compliance costs increase (e.g. due to more registrations and filings), and some may see them come down (e.g. only GST compliance instead of VAT, excise, service tax etc.). The net increase (if any) in compliance cost, to the extent not offset by increased availability of input credit, will get passed on to the end consumer by way of price increases. If net compliance costs come down, this may get passed on as a price reduction as well.
- The RNR arrived at should bake in the change in cost of compliance.
- With these safeguards in place, a suitable provision for preventing profiteering may still be considered to address cases where input credit was not available earlier, but would be available now (e.g. excise credit for distribution chain), and the business does not pass this benefit to the next level in the chain. However, the markets are reasonably efficient, and tend to self-correct (unless everyone colludes to this effect). So, this need should ideally not arise.