Economy and Business

A GST wrinkle: Anti-profiteering rules make no sense in a truly competitive market

The transition on July 1 to a Goods and Services Tax regime will be truly historic. What it must avoid is dredging up terrible legislative ideas from history – like the recent notification of anti-profiteering rules.

Jun 22, 2017
The transition on July 1 to a Goods and Services Tax regime will be truly historic. What it must avoid is dredging up terrible legislative ideas from history – like the recent notification of anti-profiteering rules. Intended to ensure that producers transfer the benefits of reduction in taxes through a “commensurate” reduction in prices, these rules are undergirded by a belief that micromanagement by committees of babus is the best way to ensure consumers get a fair deal. History suggests this is actually the worst way.
 
The rules are vaguely worded, which makes them prone to misuse. In a complex modern economy where a variety of inputs go into manufacturing of a product or provision of a service, reaching a definitive conclusion on “commensurate” transfer of tax benefits is not an ideal way to deal with a new tax architecture. Moreover, India’s experience with laws which seek to penalise profiteering is very shabby. For instance, Bengal introduced an anti-profiteering legislation almost 60 years ago. It has not made the state a role model of consumer welfare.
 
India is not the only country to have tried an anti-profiteering law during its transition to GST. Malaysia tried it but its experience does not make a compelling case. Competition is the best guarantor of consumer welfare. In a truly competitive market, a single firm will not be able to overprice. In addition, a functioning competition regulator in India should ensure that cartels do not exist. The anti-profiteering rules provide for an anti-profiteering authority to oversee their application. The authority is meant to have a two year life but its term can be extended by the GST council. The council should instead do away with the authority at the earliest.
 
The Times of India, June 22, 2017

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