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  • 5 Things to know about anti-profiteering rules under GST

    Imagine Company A sells a product to consumers. For this, the company pays a GST of say 18% or Rs 18. Now, Company A sources materials from Company B. On this transaction, Company B pays a GST too, of say 12%. This means the government earns double the amount of tax for producing one good. But it doesn’t happen this way, thanks to Input Tax Credit (ITC).

Wondering why we are talking about this? Because this is the key behind the latest ‘anti-profiteering rules’ under GST. Read on to know more:

  • What is Input Tax Credit? In the above example, company B pays a GST of 12%. Let’s say, this amounts to Rs 1.2 per item. This means the government ends up earning Rs 19.2 from every product Company A sold to the consumer. To avoid this double taxation, the government set up an Input Tax Credit. As part of this, Company A would get a ‘refund’ of Rs 1.2 per item. So net-net, it only pays the actual GST of Rs 18.

  • How does this lead to profiteering? Companies try to recover all their costs through sales. So, the sales price is almost often higher than the cost price. Now, this cost price includes the cost of paying taxes. Without taking into account the refund, companies could face a higher tax cost.

    In the above example, Company A incurs a GST cost of Rs 19.2 per item. Naturally, it would try to recover this from its customers. Its sale price, thus, is likely to be higher than Rs 19.2. However, the government offers a refund of Rs 1.2 per item. But the company may not pass on this to its customers. It could thus make an extra profit of Rs 1.2 per item. This would be considered ‘profiteering’ in the eyes of the taxman.

  • Why should this matter to you? If companies don’t pass the tax concessions to consumers, the prices could be higher than necessary. This could be potentially inflationary. In fact, world history indicates that inflation climbs in the few months after GST rollout. For example, retail inflation in Australia increased to 5.8% in the year GST was rolled out from 1.9% from the year before*. But Malaysia was able to avoid a similar fate by effectively implementing anti-profiteering laws.

  • How does the government avoid acts of profiteering? The government has set in place ‘anti-profiteering’ rules. As per Section 171 of the CGST Act, companies have to compulsorily reduce its prices to pass on the benefits of input tax credit to its consumers. And to ensure that companies follow this tax rule, the government set up a new unit known as the Directorate General of GST Intelligence (DGSTI). This unit will collect information regarding such evasion and penalise the companies.

  • How do the anti-profiteering rules affect you? Once GST is implemented, many goods and services will have a change in price based on the new tax brackets. So, if a store tries to sell you a product at a higher price, you can file a complaint with the anti-profiteering authorities. This also ensures that the migration to the GST system is not inflationary.

    • Why GST's anti-profiteering rule will prove to be a minefield of litigation  Read more

    • GST explainer part-1: What's the tax all about, how does anti-profiteering work and other basic questions answered Read more

  • 160

    Around 160 countries around the world have implemented GST or VAT. The first country to do so was France, which implemented GST in 1954. Most European countries introduced GST back in the 1970s-80s, as per an Economic Times report.