“Anti-Profiteering” clause in the revised draft model – An update

The government has proposed an “anti-profiteering” clause in the revised draft model goods and services law to ensure that businesses pass on any benefit of reduction in tax rates to consumers, a move aimed at checking any spike in prices of commodities as a result of the rollout of the ambitious tax reform measure.

The Centre on Saturday unveiled three drafts which include the model GST law, the IGST law and the compensation law which will be discussed by the GST Council in its two-day meeting starting December 2. The draft integrated GST law said that the Centre will notify the rates on the recommendations of the GST Council but it should not exceed 28%.

The previous draft did not have the “anti-profiteering” clause and tax experts said the gains made by companies due to GST needs to be passed on to consumers. “But for industry it could mean lot of paper work and implementation challenges,”

To ensure implementation of the anti-profiteering clause the Centre may set up an authority or entrust and existing authority examine if tax reduction benefits have been passed on.

The revised draft model goods and services law unveiled by the government contains an anti-profiteering clause and says that to ensure its implementation, the Centre may set up an authority or entrust an existing authority to “examine whether input tax credits availed by any registered taxable person or the reduction in the price on account of any reduction in the tax rate have actually resulted in a commensurate reduction in the price of the said goods or services supplied by him”.

The authority will have the power to impose penalty, “as may be prescribed in cases where it finds that the price being charged has not been reduced,” according to the draft.

The Union government on Saturday released the drafts of the three supporting legislations for the goods and services tax (GST).

The three draft laws—the central GST law, the integrated GST law and the compensation law—will be discussed in the next meeting of the GST Council on 2-3 December. Once the council gives its nod, the bills will be tabled in Parliament in the ongoing winter session. Passage of the bills in the upcoming winter session will be crucial for the government to meet its 1 April implementation deadline.

As per the provisions of the draft GST (Compensation To The States For Loss Of Revenue) Bill, 2016, states will be compensated for five years for any losses arising from a transition to this new indirect tax regime. The base year for calculating the compensation figure will be 2015-16. A uniform growth rate of 14% for all states will be assumed for calculating the revenue due to states and the shortfall, if any, from a transition to GST. The compensation will be paid quarterly to the states based on provisional calculations.

Besides all the indirect tax collections of the states including the value added tax, luxury tax and the entertainment tax, the taxable base will also include the revenue from the 2% central sales tax.

For special category states and the North-Eastern states, the revenue foregone by these states on account of exemptions given by them to specific entities will be included in their revenues while computing compensation. The bill also provides for imposition of a cess on certain specified items the proceeds of which will go to a GST compensation fund.

At the end of five years, it has been proposed that 50% of the unutilized funds in the GST Compensation Fund will be transferred to the consolidated fund of India, and will be distributed between the centre and the states as per the formula of the fourteenth finance commission. The remaining 50% will be distributed among the states in the ratio of their total revenues from SGST in the last year of the transition period.

The draft GST law lays out the process by which CGST and SGST will be levied and collected, the resolution of disputes and the process of registration and refunds. The draft empowers the central government to empower an existing authority or creating a new authority to ensure that the reduction in the tax rate of items are passed on to the consumers by a commensurate reduction in the price of that particular good and services supplied by him. The authority will be empowered to impose a penalty in case the lower taxes are not passed on to the consumers.

The draft also retains the provision of imposing a 1% tax collected at source on e-commerce companies. E-commerce companies will have to collect this amount from their supplier and file corresponding returns. The law also requires service tax assesses to register in every state they operate—a provision strongly opposed by telecom, banking and insurance companies as it will increase their compliance requirements.

“Provisions relating to anti profiteering, while aimed at protecting the consumers, might be difficult to implement. Many concerns of the services sector, particularly with respect to single centralized registration and clarity in terms of place of supply rules, have not been adequately addressed,” said Pratik Jain, leader, indirect tax at Pwc India, in a note.

The draft IGST law provides for the way inter-state sales will be taxed. The draft says that the IGST rate cannot be more than 28%—the highest tax slab agreed by the GST council. Yielding to demand from states, the draft law also proposes to empower state government tax officials in certain cases to act as administrators of the act, besides central tax authorities.

The draft also has provisions to allow exports of goods and services and supply of goods and services to a special economic zone to be classified as zero rated supply—situations in which the tax on input supplies is nil.

The government is keen to ensure that the three legislations are approved in the ongoing winter session of parliament to meet the deadline of rolling out GST by April 1. “These laws will be considered by GST Council in its meeting scheduled for 2nd and 3rd Dec and finalised,” revenue secretary Hasmukh Adhia said on micro blogging site Twitter.

In the revised draft, the definition of “goods” excludes securities, which means that no GST needs to be paid on sale and purchase of securities. This would allay the concerns of the stock market, brokers, mutual funds and banks as the definition of “goods” in the previous draft included securities, tax experts said.

The draft GST compensation law said that compensation payable to a state shall be provisionally calculated and released at the end of every quarter, and shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by the CAG.

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