Home >Opinion >Using anti-profiteering rules under the GST

The Indian government sees the goods and services tax (GST) as a transformative step that will benefit the entire economy. For benefits to reach the entire population, it is necessary for businesses that directly benefit from GST rate rationalization to pass them on to customers. The government had foreseen that many businesses may choose to retain the lion’s share of GST gains, leaving their customers to benefit marginally, if at all. This has become a significant concern with the recent reduction of GST rates on many items of mass consumption. The government has consequently approved the creation of a national anti-profiteering authority (NAA) and the supporting administrative machinery.

Two questions confront us: Do we need an NAA? If yes, then how can it meet its objective (to facilitate transmission of GST benefits) at reasonable cost and effort?

An NAA may be needed if businesses indeed avoid passing on GST benefits to consumers. But this is a function of the market structure, which determines pricing power. Pricing power is not feasible in competitive markets, with many sellers selling homogeneous products. These would be, for example, markets for small consumer goods like stationery and toiletries. In such markets, excess profits are competed away, leaving small margins for sellers. Attempts to maintain high margins would rapidly become unprofitable as customers switch to lower-priced competitors. Pricing power is also infeasible in markets with pricing controls, such as those for certain pharmaceutical products.

Markets where incumbents have pricing power are monopolistic or oligopolistic. Only sellers in such markets would potentially be able to retain GST-related benefits. This is not to presume that such sellers would actually retain GST benefits: The reputational cost of such an action can be high. One may infer that the NAA should only scrutinize markets with a few sellers, which tend to be large economic entities. Or conversely, industries with many small businesses should remain outside the scrutiny of the NAA.

But this begs the question: Since retention of GST benefits is only one type of abuse of market power, can the NAA be the best agency to investigate these? There already exist long-standing institutions that investigate pricing abuse, such as the Competition Commission of India (CCI). There is international precedent here. When it passed its GST law, Australia mandated its own competition commission to investigate related pricing violations. By most accounts, it acquitted its role well. There are also other bodies with the mandate to look into some pricing aspects, such as the directorate general of safeguards within the Central Board of Excise and Customs. How would a new institution, whose mandate overlaps that of pre-existing institutions, investigate pricing abuse more effectively than pre-existing institutions? It takes up time to set up a new institution like the NAA—to set up its organizational structure and administration; to staff it; to delineate its scope of operations and powers and so on. It will take a lot of time before the NAA can begin effective operations. Instead, why not expand the mandate and operations of a pre-existing body? The time to action will be shorter.

Now consider the second question: How does one minimize the costs of investigation into GST-related pricing abuse, which are borne by both government and business?

The costs to government can be minimized by scoping out the areas of investigation and defining clear rules of operation. The scope should be restricted to sectors with market power. Other sectors can safely be ignored because they would have little potential for pricing abuse. Rules could cover, inter alia, objective criteria for when to begin an investigation. Only when these criteria are met should a specific case be investigated. Setting a high bar for investigation would ensure that only egregious cases of GST-related pricing abuse are investigated. Prioritizing major offenders would reduce the total cost of investigation. It will also reduce the wastage of resources on investigating borderline cases, where conclusive proof of pricing abuse would be hard to find. The rules could also specify clear and objective methods for measuring GST-related pricing abuse, and their communication to the business community. This would give businesses clear information on rules of engagement and reduce the likelihood of subsequent appeals.

Compliance and uncertainty increase the cost of business. Clear rules for investigating pricing abuse would reduce both types of cost. If sectors for potential investigation were identified in advance—and if there was assurance that the list of at-risk sectors would not be changed arbitrarily ex-post—then unaffected sectors could proceed with confidence that their actions will not lead to scrutiny for anti-profiteering. Removal of regulatory risk (in the context of anti-profiteering) would improve business sentiment in the unaffected sectors. Moreover, compliance costs for unaffected sectors would be zero.

At-risk sectors may bear compliance and uncertainty costs, but these would be minimized if methodologies for measurement of pricing abuse were specified and adhered to. Businesses in the at-risk sector would only need to document that their actions do not meet the definition of pricing abuse as per the approved methodologies. Contingent on these conditions, they would retain the freedom to optimize their business operations.

In summary, the setting up of the NAA has the commendable intent of protecting consumers from GST-related pricing abuse. However, it may be worthwhile to debate whether the NAA is the agency best suited to investigating pricing abuse, or whether this function should be assigned to a pre-existing agency with an overlapping mandate. Care should also be taken to ensure that investigations are cost-effective. This can be achieved by narrowly scoping areas for investigation and by pre-specifying and adhering to rules of operation. Such measures will reduce costs of the government as well as the business community.

Gaurav S. Ghosh is an economist with EY. These are his personal views.

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