Anti-Profiteering Provision Under GST And Its Effectiveness

As the anti-profiteering provision under the CGST Act and Rules suffers from the 'vice of excessive delegation' and is vulnerable to be struck down as unconstitutional, assessees need to evaluate all options and calibrate their strategy to contest any anti-profiteering-related challenges/investigations...

In India, the introduction of the Value Added Tax ("VAT") was a landmark reform which paved the way for an integrated system of levy of indirect taxes across states. It was introduced across the states on the 1st of April 2005, albeit without any mechanism for price monitoring. There was a presumption that VAT would have no adverse impact on prices as it was expected to eliminate the cascading effect of a tax levied on a tax. However, it was found to have led to a significant, yet unexplained increase in prices. The Comptroller and Auditor General's office released a study in June 2010, which contained a detailed analysis of the impact of VAT on prices. It was found that although there was a significant reduction of tax rates upon the implementation of VAT, this benefit was being consumed by manufacturers and dealers across the VAT chain, but was not ultimately passed on to the ultimate consumer.

In order to ensure that such benefits arising from the implementation of Goods and Services Tax ("GST") are passed on to the end-consumers, an anti-profiteering mechanism was devised in the law to lead a smooth and effective transition into the GST regime.  

Anti-Profiteering Measure In GST Law

Section 171 of the Central Goods and Services Tax Act, 2017 ("CGST Act") states that where any reduction in rate of tax on any supply of goods or services or of input tax credit has been effected, commensurate benefit of reduction is to be passed on to the consumer. It reads as follows:

"Section 171 - Anti-profiteering measure:
(1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
(3) The Authority referred to in subsection (2) shall exercise such powers and discharge such functions as may be prescribed."

The first sub-section of Section 171 lays down a requirement to pass on commensurate benefit of GST to recipient on two aspects –

a) Reduction in effective rate of tax – Where it is found that the sum total of taxes being levied prior to the implementation of GST was more than the taxes under the GST laws, Section 171 mandates an equivalent reduction in prices on the supply to the common man. Although it was anticipated that GST rates would be based on the 'principle of equivalence', that no longer remains a guiding factor as rates have been significantly cut post-implementation as well.

b) Increased availability of input tax credit – The GST regime brings with it a seamless integrated credit system along the supply chain, which is bound to have an effect across industries. Section 171 therefore provides that the benefit accrued due to a better credit chain is to be passed on to the ultimate consumer.

However, there is little guidance that has been provided on the meaning of 'commensurate reduction' and its interpretation in different scenarios. To gain a brief understanding of the scope of this section, the rules of statutory interpretation may be looked into. Although the word 'profiteering' finds no place in the text of

Section 171, the marginal note to the section states that it is an "Antiprofiteering measure". In the case of Commissioner of Income Tax, Gujarat vs. Vadilal Lallubhai, AIR 1973 SC 1016a, the Supreme Court referred to the marginal note of the provision while interpreting the intention of the legislature and went on to observe the following:

"The marginal note for Section 44-Freads 'avoidance of tax by sales cumdividend'. This marginal note alsogives an indication as to what exactlywas the mischief that was intendedto be remedied. The legislature wasevidently trying to circumvent thedevices adopted by some of theassessees to convert their revenuereceipts into capital receipts."

Therefore, the phrase 'commensurate reduction' needs to be interpreted in a manner that would remedy the mischief of profiteering. As per Black's Law Dictionary, the word 'profiteering' means "to take advantage of unusual or exceptional circumstances to make excessive profits..."

Therefore, it can be understood that the mischief that is sought to be remedied in Section 171 is not of profits per se, but of profiteering, i.e., making unjustifiable, excessive and exorbitant profits. Hence, 'commensurate reduction' has to be interpreted in a manner that tackles unreasonable exploitative profit alone as against an unreasonable interpretation that prohibits/restricts profit per se.  

Decisions By The National Anti- Profiteering Authority

Rule 128(2) of the CGST Rules states that an application may be made to the state-level screening committee alleging that the supplier has not passed on the benefit under Section 171. Upon the satisfaction of the state-level screening committee, the application is first forwarded to the standing committee, and upon their satisfaction, it is passed on with recommendation to the National Antiprofiteering Authority ("NAA").

In the initial orders (summarized below), the NAA seemed to have aptly interpreted the anti-profiteering provisions in light of different economic factors and has not merely looked into the aspect of 'profits' enjoyed by businesses.

In Kumar Gandharv v. KRBL Limited (2018 VIL 02 NAA), the applicant alleged that the benefit of reduction in the rate of tax on "India Gate Basmati Rice" had not been passed on to the customers and that the maximum retail price of the product had in fact increased. Upon examination of the application by the Director General of Anti-profiteering, it was observed that the product was not taxable at all under the erstwhile regime, whereas it attracted a levy of GST at the rate of 5%, and resultantly, there was an increase in the rate of tax. Moreover, the price of paddy had also increased significantly. Therefore, 'profiteering' was observed to be absent in spite of an increase in the price and this was upheld by the NAA.

So also in the case of UP Sales & Services v. M/s Vrandavaneshwree Automotive Private Limited (2018 VIL 01 NAA), the applicant had signed a contract with the Respondent for buying a car and went on to contend that the car attracted a total tax rate of 51% under the erstwhile regime, whereas, it attracted only 29% under the GST regime and hence attracted the anti-profiteering measure. It was held that on an analysis of the actual figures, it was found that there was only a marginal decrease of 2% which had been passed on to the consumer by way of reduction in prices, and hence, anti-profiteering was not attracted.

In Shri Rishi Gupta v M/s Flipkart Internet Pvt Ltd (2018-VIL-04-NAA), complainant ordered an almirah on Flipkart on 4.11.2017. An invoice was raised on 7.11.2017 for an amount of '14,852/- (base price '11,994/-; GST '3,358 @ 28%; Discount '500). Subsequently, GST rate was decreased to 18%. Accordingly, new invoice was raised for '14,152/- (base price '11,994; GST '2159 @ 18%; Discount NIL). The NAA held that retaining the base price and withdrawing the discount is not anti-profiteering, as the ad-hoc discount was offered from the supplier's profit margin. It also directed that any excess GST collected from the applicant was to be refunded back and that audits are to be held to ensure the same.

However, the subsequent cases have seen NAA adopt a harsher stance – key learnings therefrom are encapsulated below (Please also refer to article by Sudipta Bhattacharjee on a similar topic in the 21st October edition of the Business Standard newspaper):

(i) If the base price has been increased exactly by the same amount by which the GST rate had been reduced – it is profiteering. [refer NAA decision in Sharma Trading Company, a distributor and stockist of a renowned FMCG brand]

- Anti-profiteering applies even if products supplied to complainant were returned against a Credit Note

- Even if the increase in the base price was made by the FMCG brand itself, stockist is liable for antiprofiteering

- Narrow interpretation placed on 'Commensurate Reduction': It was held that the amount by which GST component has reduced should be deducted from existing MRP

(ii) In the real estate sector, commensurate reduction on account of additional input credit can be calculated by comparing the ratio of input credit to taxable turnover pre-GST and post-GST and reduce the per Sq Ft rate proportionately (refer NAA decision in Pyramid Infratech case)

(iii) Benefit has to be passed on to each and every buyer and for each and every product and not only to those categories chosen by the assessee (refer NAA decision in case of Lifestyle International and Kunj Lub Marketing selling 'Maggi noodles')

There is no statutory appeal against such orders; the only remedy appears to be to file a writ before appropriate High Court(s). One such writ has just been filed in Delhi.  

Issues And Challenges

A number of uncertainties remain with respect to the implementation of the anti-profiteering provision in the GST regime. This is mostly due to the reason that neither the CGST Act nor the CGST Rules provide guidelines for the methodology and procedure to be followed to determine profiteering by the supplier, and the same has been left to the discretion of the authority.

The computation mechanism also raises questions as it has been found difficult to establish a one-to-one correlation between Input Tax Credit on inward supplies and the tax payable on outward supplies. Also, this could lead to a breach of confidentiality as the cost structure and pricing mechanism comprise of commercially sensitive information for the business. Moreover, there is no set mechanism for the apportionment of credit in order to pass on the benefit to the consumer.  

Excessive Overreach And Constitutionality

It is important to highlight that the provisions under the antiprofiteering measure in India, including the notices issued and proceedings held by the Directorate General of Antiprofiteering, are prone to constitutional challenge owing to the unbridled and uncanalized powers conferred upon the executive. 'Separation of Powers' being a fundamental feature of the Basic Structure of the Constitution draws a distinction between the functions of the legislature and the executive. It is a well-established rule of law that essential legislative functions which comprise determination of the legislative policy and its formulation, as a binding rule of conduct, cannot be delegated by the legislature to the executive. What can be delegated to the executive is only the task of regulating and implementing a legislation. Else, the executive would have overstepped into the field of the legislature and this is commonly referred to as the 'vice of excessive delegation'.

The legislature has given vague guidance in the form of Section 171 of the CGST Act. The powers of the NAA viz. return of amount, levy of interest, imposition of penalty, cancellation of registration, etc. flow solely from the CGST Rules and not from the CGST Act itself. Therefore, it can be concluded that dehors the merits in individual anti-profiteering investigations initiated against various companies, anti-profiteering provisions appear to be a textbook case of delegation of essential legislative functions to the bureaucracy and thus suffer from the vice of "excessive delegation" on that account.

A specific aspect that may be prone to litigation based on constitutionality is the power to cancel GST registration in case of violation of anti-profiteering provisions under Rule 21 of the CGST Rules, which does not have a corresponding provision in the CGST Act. Thus, the power being wholly discretionary may also fall foul of the freedom of trade and profession as envisaged under Article 19 (1)(g) of the Constitution of India.

Concluding Thoughts

Given that anti-profiteering provisions under the CGST Act and Rules suffer from the 'vice of excessive delegation' and are vulnerable to be struck down as unconstitutional, assessees need to evaluate all options and calibrate their strategy to contest any anti-profiteering-related challenges/ investigations. Assessees may explore contesting antiprofiteering investigations at the very inception, by challenging the uncanalized powers given to the NAA under a vaguely worded Section 171 vide appropriate writ petitions.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.