India’s goods and services tax promises to reduce prices for consumers — but only when prices fall. That’s where the GST anti-profiteering rules come in. If you run a business in India, understanding these rules can help you avoid accidental violations.
What is Profiteering?
To understand profiteering, it’s important to understand profit margins. When your company sells products, it gathers a variety of expenses, including taxes, building rent, raw material costs, and packaging costs. Naturally, you need to charge a higher price to make a profit. The difference between those expenses and the revenue you get from selling the products is your profit margin.
Profiteering happens when you inflate your product prices unfairly to create a higher profit margin. Companies may do this when there’s high demand for their products, or when supplies are scarce. The GST regime automatically creates opportunities for profiteering. Imagine if your tax rate was 18% before GST, but you were moved to 5% after GST. If you kept your prices the same, your profit margin would increase. However, since one of the big goals of GST is to create lower prices for consumers, the government considers this profiteering.
What Could Happen Without Anti-Profiteering Rules?
The main goal of India’s anti-profiteering clause is to prevent companies from taking all of the benefit of the GST regime. When similar tax systems have been implemented in other countries, prices have risen temporarily. When Australia moved to a GST system in 2000, the Organisation for Economic Co-operation and Development found that the prices for many goods and services got higher. As a result, the economy slowed down. Although these changes did not last, it affected Australian consumers. With anti-profiteering rules, India hopes to avoid that situation.
What Are India’s Anti-Profiteering Rules under GST?
The anti-profiteering rules are quite simple. If your business has a lower tax rate than in the pre-GST system, or if you get a tax reduction due to the input tax credit, you must pass on those benefits to your customers. The rules say that you should do this with a “commensurate reduction in prices”. You’re supposed to do the same if your product or service is moved into a lower GST rate slab.
The government rules do not specify how you can pass on these benefits — instead, it gives the anti-profiteering Standing Committee the power to judge each company on an individual basis. Chances are good that the council will move toward a product-specific anti-profiteering system. That means that you must spread out the price reduction among all items in the category, rather than specific items.
For example, in early 2018, the GST council moved tailoring services out of the 18% rate slab and into the 5% rate slab. Imagine you own a tailoring shop. Your custom-made suits tend to sell quickly, but saris are not as popular. After the 13% tax rate drop, it could be tempting to keep the prices the same on the suits, but lower them for the saris. After all, that would give you a bigger profit margin on your best-selling products. However, if the government uses product-specific enforcement, it would require you to drop prices on both products.
How Does the Government Spot Profiteering?
As part of the anti-profiteering rules, the government created a three-tier system to help spot companies that are engaging in profiteering. At the top is the National Anti-Profiteering Authority. Below them, there is a national standing committee. At the bottom of the system, each state has its own screening committee. The purpose of these groups is to hear complaints from consumers.
If a customer thinks a business is profiteering, they can submit a complaint to their state-level committee. If that committee determines that the company is violating the anti-profiteering laws, they pass the complaint on to the standing committee. That group passes it on to the Director General of Safeguards, who conducts an investigation. The director can then send a notice to the company informing them of the situation.
What Happens If You Break the Rules?
If your company gets a notice from the Director General of Safeguards, you have a chance to defend yourself. If the national authority decides that your operations are above board, you can get away with a warning. If not, it’s up to the group to decide what happens. At a minimum, you’ll probably be ordered to reduce your prices appropriately going forward. The authority might also require you to provide refunds to your customers to make up for the higher prices.
In extreme cases, the authority could decide to revoke your GST registration. That would mean that your company could not do any business that’s taxable under GST. According to the anti-profiteering rules, if the members of the national authority disagree on what to do, they need to vote. In that case, the majority decision wins.
As of April 2018, the national authority has taken steps to prove that it’s serious about cracking down on anti-profiteering. The Director of Safeguards gave anti-profiteering notices to 15 companies, including Jubilant FoodWorks, the parent company of Domino’s Pizza. The Jubilant notice was in response to just two customer complaints. Other companies that received notices included Hardcastle Restaurant and a Honda dealership.
As a business owner in India, it’s important to be aware of the GST anti-profiteering laws. By keeping detailed records and making sure you pass tax reductions and credits on to your customers, you can avoid penalties and potential GST revocation.