GST: Govt dictating prices goes against free-market spirit; will anti-profiteering law end up as tax terrorism?

In an interview  on Monday, revenue secretary, Hasmukh Adhia, gave out an explicit warning to companies planning to increase prices on products ahead of the launch of Goods and Services Tax (GST) on 1 July.

Adhia, in his not-so-indirect threat, openly asked companies to hold back rate increases till GST is rolled out and hinted that any price hike, even if it is done for reasons such as higher input cost, may be subjected to enquiries.

“My suggestion to all of them would be for the time being, till GST is rolled out, if they can hold back price increases. Unless it is a serious issue of cost increase, which they cannot absorb immediately. Otherwise hold on for some time,” Adhia said. “But still if you have to absorb your cost and you have to do it then it is a matter of inquiry subsequently,”

Adhia was responding to a question on anti-profiteering in GST laws saying it is essential to ensure that the benefits of reduction in tax incidence post-GST is passed on to the consumers. Adhia’s comments came after noticing that some companies might be already increasing their prices so that the hit on their margins won’t be major once GST happens and benefit of lower tax is passed on to consumer.

The government’s thinking to prevent such irrational price hikes that’ll ultimately burden the common man is indeed laudable.

But, the problem arises when the government gets into dictating market prices, instead of facilitating free market functions. Adhia should remember that companies tweaking prices can be a function of rise in input costs, competition and seasonal factors among others. Tax is only one component.

When Adhia says price hikes will be ‘a matter of enquiry’ that automatically sends companies into a panic mode and works against the principles of a free market. The anti-profiteering law intents to ensure that the GST benefit reaches people but it shouldn’t end up as a tool to terrorise the market to artificially control prices to get the desired outcome of the GST launch.

Remember, in an interview to Moneycontrol, Adhia had said that inflation will not go up post-implementation of GST from 1 July and that the government has taken special care to ensure that the prices don’t go up. Inflation will fall by 2 percent by the end of the financial year.

Reading the two together, the government is determined to see prices don’t go up in the market post-GST to keep its promise. Prices should fall if there are genuine reasons, but there shouldn’t be an element of force by government behind such a move.

As mentioned earlier, tax constitutes only one element that decides the final price of a product. Government dictating prices can be highly damaging to the principles of a free market. It will only be self-destructive for companies to keep prices high when input costs fall. Also, changes in tax regime gives room to companies to pass on price benefit to the end consumer. The market force will compel companies to do that.

GST is a landmark change in India’s economy, perhaps the biggest-ever indirect tax reform India has ever seen. It is important that the government makes sure the transition does not become a painful experience, both for the industries and the common man.

It needs to take the market into confidence. The actual benefits of the GST change may happen only after a lag since the system needs to adjust to the change. It is not necessary that the economic benefits of the GST shift happens immediately. In a note on Monday, rating agency, Icra said the impact of the GST on economic growth is likely to be neutral in financial year, 2018.

“In our view, the tax structure agreed by the GST Council, which intends to keep the effective tax liability stagnant or reduce the same over the majority of items, raises concerns regarding the revenue buoyancy for the GoI. Apart from the fitment of rates and early implementation issues, other factors could also pose some risks to revenue buoyancy. For instance, the threshold limit for GST registration has been set at Rs. 20 lakh of annual turnover, higher than the current threshold limit of Rs. 10 lakh for service tax, which may shrink the taxpayer base for services,” ICRA said.

However, given that the current exemption limit for excise duty is Rs. 1.5 crore, companies in the unorganised sector that are currently not paying central levies, would fall within the GoI’s tax net going forward. Additionally, we expect the tax payer base to widen over a period of time, as compliance improves, the agency said.

In a separate note, Edelweiss research said that the anti-profiteering clause enforcement will be a challenge for the government. “The anti-profiteering clause mandates GST benefits (either lower tax rates or higher input credit) to be passed on to consumers via lowering of prices of goods/services. We perceive several challenges (including reference point for comparison, product prices are influenced by multiple factors and tax is only one such factor) in enforcing this clause,” said Edelweiss.

The bottom line is this: GST is a landmark reform that could set the stage for growth for India for the next several years. The benefit of GST for the common consumer and the state exchequer will happen over a period, not overnight. If the Modi government gets into price control mode and use anti-profiteering law as a tool to terrorise companies, it is harming the spirit of free market and sending wrong message to the industry.