GST Council to now focus on price behaviour of companies

Whether firms pass on tax reduction to consumers is key, says Kerala FM

NEWDELHI: After having fixed the rates of the goods and services tax (GST) on almost all commodities and services, the GST Council is trying to ensure that businesses pass on any tax reduction benefit to consumers when the new indirect tax regime comes into force on July 1.

The most important issue related to the implementation of GST is whether the tax cuts will be passed on to consumers, Kerala finance minister Thomas Isaac said, adding that the council, which debated it prior to bringing in the anti-profiteering clause in the GST law, will discuss this matter further.

“Union finance minister Arun Jaitley has assured that we may even have a special session (of the council) on this. It is noteworthy that no industry has come forward and said maximum retail prices will be reduced in line with tax reduction,” Isaac said in an interview.

For the government, which insists that GST rates are not inflationary, it is essential for consumers to feel a cooling of prices to make the most radical tax reform since Independence politically acceptable.

The Council has to recommend to the Centre whether a separate authority is needed or the Competition Commission of India (CCI) could be authorised to ensure that the reduced tax incidence on commodities has resulted in price cuts.

Revenue secretary Hasmukh Adhia had told reporters after the two-day meeting of the council in Srinagar that even if the anti-profiteering mechanism is set up three months from now, it will have the power to question corporate behaviour since the finalisation of GST rates.

Competition law experts doubted whether the CCI would get into price regulation. They say the anti-profiteering clause in the Central GST Act is a “political message”.

The GST rate on a large section of services will fall into the 18% slab, which is three percentage points more than what is levied now, but both Jaitley and Adhia clarified last week that the efficiency in GST that eliminates the cascading or tax-on-tax effect of the current system will reduce the effective incidence of tax on services to a level much lower than the “headline” rate of 18%. The government believes the same will apply to goods as well.

According to consulting firm EY, the proposed GST rates imply reduction in tax incidence on items like mobile phones, processed food, energy drinks, contact lenses and utensils, while there is an increase in the case of items such as watches, air conditioners, washing machines and perfumes.

CCI mostly regulates corporate behaviour such as cartelisation and abuse of dominance and leaves pricing to be determined by the market, intervening only if the market is distorted, explained Subodh Prasad Deo, a partner at law firm Saikrishna and Associates and former additional director general at CCI.

Actual price regulation is limited to sectors such as power and pharmaceuticals. A part of the pharmaceutical industry is regulated under the Essential Commodities Act. CCI’s mandate to look into unfair pricing is in the limited context of a dominant market player imposing unfair conditions on pricing.

“Prices are not regulated, least of all by competition authorities as it is generally determined by the market. Competition regulators are reluctant to get into the issue of unfair pricing as they do not have a yardstick to determine what a fair price would be,” said Deo.

In the market economy, what is seen is that prices are determined by the top players, said Kerala finance minister Isaac.

“The state is reducing taxes on the condition that the benefit may be transferred to consumers. If businesses do not respond, the government has to intervene,” he said.

Jammu & Kashmir finance minister Haseeb Drabu, who hosted the 14th meeting of the GST Council in Srinagar, also said the most important GST implementation issue is making sure that the benefit of tax reduction reaches consumers.