In Covid-19 times, it would be imperative that the authorities account for business factors before giving any decision on ‘profiteering’
It is indeed extraordinary times, with the world fighting an unrelenting pandemic. Some big shifts are being seen in the global economy, maybe the biggest slowdown in the post-war era. The business world is trying to make sense of this new world order, with disrupted supply chains, trade impediments, geopolitical issues, changed economic conditions, a substantial decrease in demand to no demand at all for certain businesses (like travel, automobiles), customers in a liquidity crisis, among others. Businesses may be forced to quickly recalibrate and employ short-term and long-term measures to survive the liquidity crisis, such as a change in operating structures, transacting models, rehashing priority list of vendors and customers, re-configuring supply chains, etc.
Amidst this pandemonium, governments around the world are introducing fiscal and legislative measures to help revive the economy. The Indian government has also introduced several measures. In this regard, it would be relevant to examine the application of anti-profiteering contained in the GST law.
As a quick recap, anti-profiteering was put in place so that businesses pass on the benefit of lower taxes and expanded input credit on account of the introduction of GST. The provision mandates explicitly passing ‘benefit’ to the recipient, by way of commensurate reduction of prices. It does not lay down any method or approved formula to calculate the said ‘benefit’. Also, it does not specify whether the same is applicable at a product level/service level/entity level, nor does it define the circumstance in which it would be applicable.
An anti-profiteering authority was also set up to monitor such profiteering. When introduced, the authority was constituted with a sunset of two years. While this tenure has been extended till 2021, questions remain on the future of section 171 of CGST Act, 2017—there is no sunset clause associated with this.
Coming to the current pandemic, as mentioned, several trade facilitation measures have been taken by the government to ease the liquidity crisis, such as immediate cut-down of TDS/TCS rates, an extension of tax compliances, an expeditious grant of refund claims, a moratorium on payment of pending dues, reduction in the tax rate for maintenance repair and overhaul services, among others. Despite such measures, the generation of consumption/demand amongst customers post lockdown would be a big challenge for the industry. Many suppliers will be led to increase prices to offset the said downturn and liquidity issues.
Given its wide scope, the anti-profiteering authorities would technically have locus standi to pursue those not passing on the ‘benefit’ to end customers even in the scenario of an economic downturn. In the past, orders pronounced by anti-profiteering authorities have not opined on commercial/economic factors, while seeking a reduction in the base price. For instance, in the real estate sector, for any increase in input credits in the post-GST implementation era, it appears that the National Anti-Profiteering Authority (NAA) adopted a standard method of identifying the benefit of the tax credit as the difference between the proportionate tax credits available pre-GST and post-GST. They also used a common yardstick in comparing the base price pre-rate reduction, and post-rate reduction, for determining the amount of profiteering.
However, since the landscape of doing business has changed in the last quarter and continues to change today as well, base price comparisons to determine anti-profiteering would be unfair and harsh on suppliers. Authorities should ideally factor the changed business realities before chasing suppliers. While investigating, anti-profiteering authorities would need to be mindful of Covid-19 factors such as running costs meter, reduced economies of scale, increased supply chain costs, restriction in cross border movements, and such other factors. Thus, in instances of change in law or business structure, prices may eventually be driven-up. However, it would be wrong to compare the base price to a time when the economic conditions were stable, pre-Covid-19. In a free economy, market forces and economic conditions should ideally be the ‘price determinants’, with demand and supply conditions contributing to pricing.
Taking note of the word ‘profiteering’, would imply making a profit from unethical means, however, tough economic conditions certainly cannot be considered ‘unethical’. In Covid-19 times, it would be imperative that the authorities account for business factors before giving any decision on ‘profiteering’.
Alternatively, the government may also look for a temporary suspension of the anti-profiteering provisions till things are normalised, and the economy is up and running in full swing.
The author is Partner and Head of Tax, KPMG In India. Views are personal