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.

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.