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Why was there no inflationary impact of GST?
June, 07th 2018

GST legislation has an innocuous provision hidden in the maze of an otherwise not so succinct GST law.

In the din of initial glitches in the GSTN platform, a major triumph of GST implementation in India went unnoticed. The fact that there has been negligible or no increase in prices of goods, particularly FMCG, post introduction of GST, is by no means a mean accomplishment of the GST Council. Typically, one could expect the business in general not to miss cashing in on this potential opportunity by ramping up prices under the guise of GST. Of course, one could argue that market competition counteracts any profiteering inclinations. But, as we know, a large part of consumer product and services markets is imperfect (possibly oligopolistic), and definitely in the short run. So, why was there no inflationary impact of GST?

GST legislation has an innocuous provision hidden in the maze of an otherwise not so succinct GST law. The simple requirement under Section 171 of the Central GST Act is that benefits of any tax rate reduction on the supply of goods or services or of any enlarged tax credit available to a dealer should be passed on to the buyer by way of a ‘commensurate reduction’ in the price of goods or services.

Interestingly, while GST rules did provide for a rather laborious hierarchical procedure to be followed on a complaint of anti-profiteering, the rules were mum on the guidelines or, precisely, the computational methodology that would be followed by GST authorities to determine or ascertain profiteering.

Not having tied itself to any statutorily prescribed set of definitive rules or guidelines meant that the National Anti-profiteering Authority (NAA) had a free hand and wide discretion to examine a case of profiteering. Thus, it can examine the case for profiteering at an individual product level or at the level of a business segment or even at legal entity level. Again, it can choose to scrutinise prices on a state-wise or on a national basis; it could select any base period for comparison, and elect whether to confine its scrutiny to B2C or whether to extend it to even B2B transactions.

At the operating level, there are no guiding principles on what is meant by ‘commensurate reduction’ and what extra costs could be permitted to be offset against the benefit of lower tax rates or extra input credits available to a business. For example, whether costs of GST compliance including implementing new ERP software could be factored in the price computation to gauge profiteering element?

Not to mention, the fear of facing a three-stage arduous review process (Standing Committee, DG Safeguards and NAA) loomed large on big corporates. Particularly so, as with its unhinged authority to seek any details and documentation, the investigation process posited by DG Safeguards (ostensibly confidential) could potentially bare publicly the entire product cost and pricing structure of a corporate.
The message to industry and trade was loud and clear—don’t monkey around with any savvy marketing strategy or subterfuges to increase profit margins and make a quick buck under the garb of GST impact on prices.

There were other factors, too, which checked the capitalistic craving for profits. One, the threat of bad press and possible public shaming of belittling the ‘mother of all tax reforms’. After all, GST is intended to benefit industry, particularly big business, in the long run, by enhancing the tax base and curbing tax evasion. Thus, many MNCs on their own volition came forward and sought to deposit with the government additional profits they could not pass on timely to the consumer.

Others took a decision to internally eat up and bear additional initial tax costs rather than raise prices. Few others chose to not follow their periodic annual practice to raise prices of commodities basis the price index (done to account for year-on-year inflation in costs). Many consumer product companies made it a point to widely advertise in national dailies their revised low prices on the introduction of GST to thwart potential profiteering complaints.

All in all, the bugbear of the government, a potential inflationary impact of GST, was phenomenally well addressed. The strategy to counter a runaway price increase in the markets was artfully architectured and its implementation was ingenious. A motley mix of measures—consciously maintained legal ambiguity in the anti-profiteering legislation, protracted procedure for profiteering determination, threat of immediate punitive action against profiteering and a well-fuelled propaganda machinery which front-paged action taken by the government on any potential profiteering behaviour of business—nipped in the bud any unseemly price increase in the wake of the GST introduction.

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