GST rates and anti-profiteering

Legislation

GST rates and anti-profiteering

Vatsal Khullar - May 24, 2017 Comments

Over the last two months, the centre and over 15 states have passed laws to levy the Goods and Services Tax (GST). Under these laws, tax rates recommended by the GST Council will be notified by the government. The Council met in Srinagar last week to approve rates for various items. Following this decision, the government has indicated that it may invoke provisions under the GST laws to monitor prices of goods and services.[1] This will be done by setting up an anti-profiteering authority to ensure that reduction in tax rates under GST results in a fall in prices of goods and services. In this context, we look at the rates approved by the GST Council, and the role of the proposed authority to ensure that prices of various items do not increase under GST.

Q. What are the tax rates that have been approved by the Council?

The Council has classified various items under five different tax rates: (i) 5%, (ii) 12%, (iii) 18%, (iv) 28%, and (v) 28% with an additional GST compensation cess (see Table 1).[2]^,[3],[4] While tax rates for most of the goods and services have been approved by the Council, rates for some remaining items such as biscuits, textiles, footwear, and precious metals are expected to be decided in its next meeting on June 3, 2017.

Table 1: Tax rates for goods and services as approved by the GST Council

	5%	12%	18%	28%	28% + Cess
Goods	Tea and Coffee Medicines Edible Oils	Butter and Cheese Sanitary Napkins Mobile Phones Dry Fruits Tractors Agarbatti	Toothpaste Soap Bars Computers	Chocolate Shampoo Washing Machine Air Conditioner (AC)	Aerated Drinks + 12% Cess Small Cars + 1% or 3% Cess (depending on petrol or diesel engine) Big Cars + 15% Cess
Services	Transport by rail Air transport by economy class	Air transport by business class Non-AC Restaurant without liquor license	Restaurant with liquor license AC Restaurant Other services not specified under any other rate (such as telecommunication and financial services)	Entertainment (such as cinemas and theme parks) Gambling Restaurants in 5 star hotels

Source: GST Council Press Release, Central Board for Excise and Customs.

Q. Will GST apply on all goods and services?

No, certain items such as alcohol for human consumption, and petroleum products such as petrol, diesel and natural gas will be exempt under GST. In addition to these, the GST Council has also classified certain items under the 0% tax rate, implying that GST will not be levied on them. This list includes items of daily use such as wheat, rice, milk, eggs, fresh vegetables, meat and fish. Some services such as education and healthcare will also be exempt under GST.

Q. How will GST impact prices of goods and services?

GST subsumes various indirect taxes and seeks to reduce cascading of taxes (tax on tax). With greater efficiency in the supply of products, enhanced flow of tax credits, removal of border check posts, and changes in tax rates, prices of goods and services may come down.[5]^,[6],[7] Mr Arun Jaitley recently stated that the Council has classified several items under lower tax rates, when compared to the current system.[8]

However, since some tax rates such as VAT currently vary across states, the real impact of GST rates on prices may become clear only after its roll-out. For example, at present VAT rates on smart phones range between 5-15% across states. Under GST they will be taxed at 12%.[9] As a result while phones may become marginally cheaper in some states, their prices may go up in some others.

Q. What happens if tax rates come down but companies don’t reduce prices?

Few people such as the Union Revenue Secretary and Finance Ministers of Kerala and Jammu and Kashmir have expressed concerns that companies may not lower their prices despite a fall in tax rates, in order to increase their profits. The Revenue Secretary also stated that the government had received reports of few businesses increasing their product prices in anticipation of GST.[10]

To take care of such cases, the GST laws contain a provision which allows the centre to constitute an anti-profiteering authority. The authority will ensure that a reduction in tax rates under GST is passed on to the consumers. Specific powers and functions of the authority will be specified by the GST Council.[11]^,[12]

Q. Are there any existing mechanisms to regulate pricing of products?

Various laws have been enacted over the years to control the pricing of essential items, or check for unfair market practices. For example, the Essential Commodities Act, 1955 controls the price of certain necessary items such as medicines, food items and fertilisers.[13]

Parliament has also created statutory authorities like the Competition Commission of India to check against unfair trade practices such as cartelisation by businesses to inflate prices of goods. Regulators, such as the National Pharmaceutical Pricing Authority, are also responsible for regulating prices for items in their sectors.

Q. Could there be some challenges in implementing this mechanism?

To fulfil its mandate, the anti-profiteering authority could get involved in determining prices of various items. This may even require going through the balance sheets and finances of various companies. Some argue that this is against the idea of prices being determined by market forces of demand and supply.[14]

Another aspect to consider here is that the price of items is dependent on a combination of factors, in addition to applicable taxes. These include the cost of raw material, technology used by businesses, distribution channels, or competition in the market.

Imagine a case where the GST rate on a category of cars has come down from the current levels, but rising global prices of raw material such as steel have forced a manufacturer to increase prices. Given the mandate of the authority to ensure passing of lower tax rates to consumers, will it also consider the impact of rising input costs deciding the price of an item? Since factor costs keep fluctuating, in some cases the authority may find it difficult to evaluate the pricing decision of a business.

Q. Have other countries tried to introduce similar anti-profiteering frameworks?

Some countries such as Malaysia have in the past introduced laws to check if companies were making unreasonably high profits after the roll-out of GST.[15] While the law was supposed to remain in force for a limited period, the deadline has been extended a few times. In Australia, during the roll out of GST in the early 2000s, an existing authority was entrusted with the role of taking action against businesses that unreasonably increased prices.[16] The authority also put in place a strategy to raise consumer awareness about the available recourse in cases of price exploitation.

With rates for various items being approved, and the government considering a mechanism to ensure that any inflationary impact is minimised, the focus now shifts to the implementation of GST. This includes operationalisation of the GST Network, and notification of rules relating to registration under GST and payment of tax. The weeks ahead will be crucial for the authorities and various taxpayers in the country to ensure that GST is successfully rolled out from July 1, 2017.

[1] After fixing rates, GST Council to now focus on price behaviour of companies, The Hindustan Times, Ma 22, 2017, http://www.hindustantimes.com/business-news/after-fixing-rates-gst-council-to-now-focus-on-price-behaviour-of-companies/story-fRsAFsfEofPxMe2IXnXIMN.html.

[2] GST Rate Schedule for Goods, Central Board of Excise and Customs, GST Council, May 18, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/chapter-wise-rate-wise-gst-schedule-18.05.2017.pdf.

[3] GST Compensation Cess Rates for different supplies, GST Council, Central Board of Excise and Customs, May 18, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/gst-compensation-cess-rates-18.05.2017.pdf.

[4] Schedule of GST Rates for Services as approved by GST Council, GST Council, Central Board of Excise and Customs, May 19, 2017, http://www.cbec.gov.in/resources//htdocs-cbec/gst/Schedule%20of%20GST%20rates%20for%20services.pdf.

[5] GST rate impact: Here’s how the new tax can carry a greater punch, The Financial Express, May 24, 2017, http://www.financialexpress.com/economy/gst-rate-impact-heres-how-the-new-tax-can-carry-a-greater-punch/682762/.

[6] “So far, the GST Council has got it right”, The Hindu Business Line, May 22, 2017, http://www.thehindubusinessline.com/opinion/the-gst-council-has-got-it-right/article9709906.ece.

[7] “GST to cut inflation by 2%, create buoyancy in economy: Hasmukh Adhia”, The Times of India, May 21, 2017, http://timesofindia.indiatimes.com/business/india-business/gst-to-cut-inflation-by-2-create-buoyancy-in-economy-hasmukh-adhia/articleshow/58772448.cms.

[8] GST rate: New tax to reduce prices of most goods, from milk, coal to FMCG goods, The Financial Express, May 19, 2017, http://www.financialexpress.com/economy/gst-rate-new-tax-to-reduce-prices-of-most-goods-from-milk-coal-to-fmcg-goods/675722/.

[9] “Goods and Services Tax (GST) will lead to lower tax burden in several commodities including packaged cement, Medicaments, Smart phones, and medical devices, including surgical instruments”, Press Information Bureau, Ministry of Finance, May 23, 2017.

[10] “GST Townhall: Main concern is consumer education, says Adhia”, Live Mint, May 24, 2017.

[11] The Central Goods and Services Tax Act, 2017, http://www.prsindia.org/uploads/media/GST,%202017/Central%20GST%20Act,%202017.pdf.

[12] Rajasthan Goods and Services Tax Bill, 2017; Madhya Pradesh Goods and Services Tax Bill, 2017; Uttar Pradesh Goods and Services Tax Bill, 2017; Maharashtra Goods and Services Tax Bill, 2017.

[13] The Essential Commodities Act, 1955.

[14] “GST rollout: Anti-profiteering law could be the new face of tax terror”, The Financial Express, May 23, 2017, http://www.financialexpress.com/opinion/gst-rollout-anti-profiteering-law-could-be-the-new-face-of-tax-terror/680850/.

[15] Price Control Anti-Profiteering Act 2011, Malaysia.

[16] ACCC oversight of pricing responses to the introduction of the new tax system, Australia Competition and Consumer Commission, January 2003, https://www.accc.gov.au/system/files/GST%20final%20report.pdf.

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Examining urban local governance in India through the case of Bengaluru

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Prachi Kaur and Shruti Gupta - December 24, 2020 Comments

Recently, the Karnataka legislature passed the Bruhat Bengaluru Mahanagara Palike (BBMP) Bill, 2020. BBMP is the municipal corporation of the Greater Bengaluru metropolitan area. The BBMP Act, 2020 seeks to improve decentralisation, ensure public participation, and address certain administrative and structural concerns in Bengaluru. In this blog, we discuss some common issues in urban local governance in India, in the context of Bengaluru’s municipal administration.

The Constitution (74th Amendment) Act, 1992 provided for the establishment of urban local bodies (ULBs) (including municipal corporations) as institutions of local self-government. It also empowered state governments to devolve certain functions, authority, and power to collect revenue to these bodies, and made periodic elections for them compulsory.

Urban governance is part of the state list under the Constitution. Thus, the administrative framework and regulation of ULBs varies across states. However, experts have highlighted that ULBs across India face similar challenges. For instance, ULBs across the country lack autonomy in city management and several city-level functions are managed by parastatals (managed by and accountable to the state). Several taxation powers have also not been devolved to these bodies, leading to stressed municipal finances. These challenges have led to poor service delivery in cities and also created administrative and governance challenges at the municipal level.

BBMP was established under the Karnataka Municipal Corporation Act, 1976 (KMC Act). The BBMP Act, 2020 replaces provisions of the KMC Act, 1976 in its application to Bengaluru. It adds a new level of zonal committees to the existing three-tier municipal structure in the city, and also gives the Corporation some more taxation powers. Certain common issues in urban local governance in India, with provisions related to them in the BBMP Act, 2020 are given below.

Functional overlap with parastatals for key functions

The Constitution (74^th Amendment) Act, 1992 empowered states to devolve the responsibility of 18 functions including urban planning, regulation of land use, water supply, and slum upgradation to ULBs. However, in most Indian cities including Bengaluru, a majority of these functions are carried out by parastatals. For example, in Bengaluru, the Bengaluru Development Authority is responsible for land regulation and the Karnataka Slum Clearance Board is responsible for slum rehabilitation.

The BBMP Act, 2020 provides the Corporation with the power and responsibility to prepare and implement schemes for the 18 functions provided for in the Constitution (74^th Amendment) Act, 1992. However, it does not provide clarity if new bodies at the municipal level will be created, or the existing parastatals will continue to perform these functions and if so, whether their accountability will shift from the state to the municipal corporation.

This could create a two-fold challenge in administration. First, if there are multiple agencies performing similar functions, it could lead to a functional overlap, ambiguity, and wastage of resources. Second, and more importantly, the presence of parastatals that are managed by and accountable to the state government leads to an erosion of the ULB’s autonomy. Several experts have highlighted that this lack of autonomy faced by municipal corporations in most Indian cities leads to a challenge in governance, effective service delivery, and development of urban areas.

An Expert Committee on Urban Infrastructure (2011) had recommended that activity mapping should be done for the 18 functions. Under this, functions in the exclusive domain of municipalities and those which need to be shared with the state and the central government must be specified. Experts have also recommended that the municipality should be responsible for providing civic amenities in its jurisdiction and if a parastatal exercises a civic function, it should be accountable to the municipality.

Stressed municipal finances

Indian ULBs are amongst the weakest in the world in terms of fiscal autonomy and have limited effective devolution of revenue. They also have limited capacity to raise resources through their own sources of revenue such as property tax. Municipal revenue in India accounts for only one percent of the GDP (2017-18). This leads to a dependence on transfers by the state and central government.

ULBs in states like Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Rajasthan, and Haryana are in poor financial condition. This has been attributed to limited powers to raise revenue and levy taxes, and problems in the management of existing resources. For instance, the finances of Bihar’s ULBs were assessed to be poor because of: (i) delays in release of grants, (ii) inadequate devolution of funds, and (iii) delays in revision of tax rates and assessments of landholdings.

In comparison, Karnataka ranks high among Indian states in key indicators for fiscal capacity like collection of property taxes, grants from Central Finance Commissions, and state government transfers. The BBMP Act, 2020 further increases the taxation powers of the Corporation, by allowing it to impose taxes on professions and entertainment.

Experts have recommended that the central government and the respective state government should provide additional funds and facilitate additional funding mechanisms for ULBs to strengthen their finances. The revenue of ULBs can be augmented through measures including assignment of greater powers of taxation to the ULBs by the state government, reforms in land and property-based taxes (such as the use of technology to cover more properties), and issuing of municipal bonds (debt instruments issued by ULBs to finance development projects).

Powers of elected municipal officials

The executive power with state-appointed municipal Commissioners and elected municipal officers differs across states. States like Tamil Nadu and Gujarat, and cities like Chennai and Hyderabad vest the executive power in the Commissioner. In contrast, the executive power of the Corporation is exercised by a Mayor-in council (consisting of the Mayor and up to 10 elected members of the Corporation) in Kolkata and Madhya Pradesh. This is unlike large metropolitan cities in other countries like New York and London, where elected Mayors are designated as executive heads. Experts have noted that charging Commissioners with executive power diluted the role of the Mayor and violated the spirit of self-governance.

Under the BBMP Act, 2020, both the elected Mayor and the state-appointed Chief Commissioner exercise several executive functions. The Mayor is responsible for approving contracts and preparing the budget estimate for the Corporation. He is also required to discharge all functions assigned to him by the Corporation. On the other hand, executive functions of the Chief Commissioner include: (i) selling or leasing properties owned by the Corporation, and (ii) regulating and issuing instructions regarding public streets.

The Expert Committee on Urban Infrastructure (2011) has recommended that the Commissioner should act as a city manager and should be recruited through a transparent search-cum-selection process led by the Mayor. A Model Municipal law, released by the Urban Development Ministry in 2003, provided that the executive power should be exercised by an Empowered Standing Committee consisting of the Mayor, Deputy Mayor, and seven elected councillors.

Management of staff and human resources

Experts have noted that municipal administration in India suffers from staffing issues which leads to a failure in delivering basic urban services. These include overstaffing of untrained manpower, shortage of qualified technical staff and managerial supervisors, and unwillingness to innovate in methods for service delivery.

The BBMP Act, 2020 provides that the Corporation may make bye-laws for the due performance of duties by its employees. However, it does not mention other aspects of human resource management such as recruitment and promotion. A CAG report (2020) looking at the implementation of the Constitution (74th Amendment) Act, 1992 in Karnataka has observed that the power to assess municipal staff requirements, recruiting such staff, and determining their pay, transfer and promotion vests with the state government. This is in contrast with the recommendations of several experts who have suggested that municipalities should appoint their personnel to ensure accountability, adequate recruitment, and proper management of staff.

Other states including Kerala, Maharashtra and Tamil Nadu also allow the state governments to regulate recruitment and staffing for ULBs. In cities like Mumbai, and Coimbatore, and some states like Gujarat and Madhya Pradesh, while the recruitment process is conducted by the respective municipal corporations, the final sanction for hiring staff lies with the state government.

Anti-Conversion Legislation: Comparison of the UP Ordinance with other state laws

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Anoop Ramakrishnan - December 17, 2020 Comments

On November 27, 2020, the Uttar Pradesh (UP) Prohibition of Unlawful Conversion of Religion Ordinance, 2020 was promulgated by the state government. The Ordinance seeks to regulate religious conversions and prohibits certain types of religious conversions (including through marriages). Few other states, including Haryana and Karnataka are also planning to introduce a similar law. This blog post looks at existing anti-conversion laws in the country and compares the latest UP Ordinance with these laws.

Anti-conversion laws in India

The Constitution guarantees the freedom to profess, propagate, and practise religion, and allows all religious sections to manage their own affairs in matters of religion; subject to public order, morality, and health. To date, there have been no central legislations restricting or regulating religious conversions. Further, in 2015, the Union Law Ministry stated that Parliament does not have the legislative competence to pass an anti-conversion legislation. However, it is to be noted that, since 1954, on multiple occasions, Private Member Bills have been introduced in (but never approved by) the Parliament, to regulate religious conversions.

Over the years, several states have enacted ‘Freedom of Religion’ legislation to restrict religious conversions carried out by force, fraud, or inducements. These are: (i) Odisha (1967), (ii) Madhya Pradesh (1968), (iii) Arunachal Pradesh (1978), (iv) Chhattisgarh (2000 and 2006), (v) Gujarat (2003), (vi) Himachal Pradesh (2006 and 2019), (vii) Jharkhand (2017), and (viii) Uttarakhand (2018). Additionally, the Himachal Pradesh (2019) and Uttarakhand legislations also declare a marriage to be void if it was done for the sole purpose of unlawful conversion, or vice-versa. Further, the states of Tamil Nadu (2002) and Rajasthan (2006 and 2008) had also passed similar legislation. However, the Tamil Nadu legislation was repealed in 2006 (after protests by Christian minorities), while in case of Rajasthan, the bills did not receive the Governor’s and President’s assent respectively. Please see Table 2 for a comparison of existing anti-conversion laws across the country.

In November 2019, citing rising incidents of forced/fraudulent religious conversions, the Uttar Pradesh Law Commission recommended enacting a new law to regulate religious conversions. This led the state government to promulgate the recent Ordinance. We discuss the key features of the ordinance below.

What does the UP Ordinance do?

The Ordinance defines conversion as renouncing one’s existing religion and adopting another religion. It prescribes a procedure for individuals seeking to undergo conversions (in the state of Uttar Pradesh) and declares all other forms of conversion (that violate the prescribed procedures) illegal.

Procedure for conversion: The Ordinance requires individuals (seeking to convert) and religious convertors (who perform such conversions) to submit an advance declaration of the proposed religious conversion to the District Magistrate (DM). The declarations have to be given with a notice of: (i) 60 days by the individual, and (ii) one month by the convertor. On receiving both the declarations, the DM is required to conduct a police enquiry into the intention, purpose, and cause of the proposed conversion.

Once the conversion has taken place, within 60 days from the date of conversion, the converted person must submit a declaration (with various personal details) to the DM. The DM will then publicly exhibit a copy of the declaration (till the conversion is confirmed) and record any objections to the conversion. The converted person must then appear before the DM to establish his/her identity, within 21 days of sending the declaration, and confirm the contents of the declaration. Violating any of these procedures will render the conversion illegal and void, and will attract punishment of: (i) imprisonment between six months and three years, and a fine of at least Rs 10,000 (for individuals seeking to convert), and (ii) imprisonment between one and five years, and a fine of at least Rs 25,000 (for convertors).

Prohibition on conversions: The Ordinance prohibits conversion of religion through means, such as: (i) force, misrepresentation, undue influence, and allurement, or (ii) fraud, or (iii) marriage. It also prohibits a person from abetting, convincing, and conspiring to such conversions. The Ordinance assigns the burden of proof of the lawfulness of religious conversion to the persons causing or facilitating such conversions. However, a person reconverting to his/her immediate previous religion is allowed.

Marriages involving religious conversion: Under the Ordinance, a marriage is liable to be declared void if it was done for the sole purpose of unlawful conversion, or vice-versa. However, a marriage involving religious conversion is permitted if the conversion is undergone as per the procedure laid down under the Ordinance.

Punishment for unlawful conversions: The Ordinance provides for punishment for causing or facilitating unlawful religious conversion, as specified in Table 1. Further, the accused will be liable to pay compensation of up to five lakh rupees to the victim of conversion. Additionally, repeat offences will attract double the punishment specified for the respective offence. All offences under the Ordinance are cognisable and non-bailable.

Table 1: Punishments prescribed under the Ordinance for offences by individuals for causing/facilitating the conversion

Type of offence	Term of imprisonment	Fine amount
Mass conversion (conversion of two or more persons)	3-10 years	Rs 50,000 or more
Conversion of a minor, woman, or person belonging to SC or ST	2-10 years	Rs 25,000 or more
Any other conversion	1-5 years	Rs 15,000 or more

If any of the above three offences are committed by an organisation, the registration of the organisation is liable to be cancelled and grants or financial aid from the state government is liable to be discontinued.

Note: For Odisha, Jharkhand, and Uttarakhand, some of the penalties have been specified in the Rules published under their respective Acts. For the rest of the states, the penalties have been specified in the respective Acts.

GST rates and anti-profiteering

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