The government deserves full marks for trying to put in place what seems to be a largely inflation-neutral GST tax structure.
The government deserves full marks for trying to put in place what seems to be a largely inflation-neutral GST tax structure. However, repeated warnings to companies telling them not to profit unduly from the benefits of lower tax incidence are unwarranted. Indeed, the revenue secretary has gone so far as to ask companies to hold back on any prices until July 1, when the GST will be rolled out, unless of course there has been a big jump in input costs which they are not in a position to absorb. Companies, for their part, are understandably anxious about the anti-profiteering provision which, as this newspaper has argued, is a retrograde step. While the rules on how this is to be implemented are yet to be finalised, there is a fear it could result in unjustified penalties on firms. While downplaying fears of what the anti-profiteering authority can do, the revenue secretary has said that GST will result in a much lower tax incidence for a host of goods and services and if companies do not pass on the gains, the government’s calculations for inflation will go wrong.
An anti-profiteering authority goes against the principles of a free market. Instead of putting out rules and regulations, the government should simply allow market forces to operate; at a time when demand is sluggish, in any case, it is unlikely companies are going to be able to hike prices beyond a point. More important, empowering tax inspectors to monitor prices will lead to a great deal of undue harassment; after all there are several elements that go into the costing of a product in addition to the bill of materials. How is the taxman—or the anti-profiteering authority—going to judge how much of the price of a good or service is determined by taxes; a company may have absorbed a loss due to poor demand earlier, for instance, which it may now want to pass on. Similarly, if prices are hiked beyond the hike in taxes, how is the anti-profiteering authority to determine how much of this was justified due to input-cost hikes or due to changed demand conditions? Given the migration to GST isn’t going to be easy, the very last thing Indian industry needs is unnecessary power for tax officials who, in the past, have shown they can behave arbitrarily and be unreasonable. Also, the tax department is unlikely to have the necessary infrastructure to check and assess pricing across thousands of companies.
If GST serves its objective of lowering the tax burden by preventing cascading of taxes and subsuming all manner of levies, given the competition, it is unlikely the benefits won’t be passed on to consumers. The problem with the anti-profiteering authority that the government is holding out as a threat to firms that do not pass on tax cuts—or who raise prices by more than the tax increases—is that this reinforces the image of a government that is uncomfortable with the free market. From agricultural commodities to medicines and more, the government has invoked price controls far too often in the last three years—in the case of cardiac stents, when price controls resulted in manufacturers wanting to withdraw their products, the government mandated that they stick to previous output levels. In the long run, we have already seen in the case of medicines, along with a reduction in production of price-capped items, R&D and investment in the sector falls, too.