In this article, the GST provisions relating to anti-profiteering have been examined in the wake of initiation of anti-profiteering investigations by the Directorate General of Safeguards against various companies and a writ remedy is explored as an effective option to deal with such anti-profiteering investigations.
It has been the experience of many countries that when GST was introduced, there has been a marked increase in inflation and the price of the commodities in spite of the availability of increased tax credits which should have effectively reduced the final prices. This was happening because the suppliers were not passing on the benefit of increased availability of credits to the consumer. Even when VAT was introduced across various States in 2005, it was noted that benefits accruing to sellers owing to VAT was not passed on to the end-customer (this was pointed out by the CAG in their report entitled ‘Lessons for transition to Goods and Services Tax’ in June 2010).
To overcome such a situation post-GST, Section 171 of the CGST Act, 2017 was enacted which mandates that any reduction in rate of tax on any supply of goods/ services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Section 171 is excerpted below:
“(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 sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.”
Section 171 further provides that the Authority constituted by the Government would be responsible for determination of whether the benefits accrued to the suppliers have been commensurately passed on to their customers.
Pursuant to the foregoing, the Government has constituted National Anti-profiteering Authority to examine whether increased credits availed by any registered person or the reduction in the tax rate on inputs after implementation of GST have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him – the Directorate General of Safeguards is the investigating agency that would support the National Anti-profiteering Authority (NAA).
Notices initiating anti-profiteering investigations – how to deal with them?
In furtherance to the above, notices initiating anti-profiteering investigations have been sent by Directorate General of Safeguards against certain companies. These notices, inter alia, seek detailed information/documents like financials for 2016-17, trial balance till December 2017, GST returns till December, TRAN-1 form, sample invoices, input tax credit register etc.
One possible strategy to deal with such notices would be to provide the above documents and try to demonstrate to the Directorate General of Safeguards (“DGS”) that there is factually no reduction in tax rate or benefit of enhanced input tax credit that merits ‘commensurate reduction’ in prices.
The problem with the aforementioned strategy is that no one knows what is the acceptable methodology to demonstrate the absence of ‘profiteering’ – Neither the CGST Act nor the CGST Rules provide the guidelines/methodology for ascertaining the factum/quantum of ‘profiteering’ by the supplier, and the same has been left to the discretion of the executive/bureaucracy.
This brings us to an alternative approach – challenging such notices (and proceedings that would follow) through a writ petition before the relevant High Court on account of the anti-profiteering mechanism being unconstitutional owing to the vice of excessive delegation. Whatever be the merits of individual anti-profiteering investigations, the provisions relating to anti-profiteering are prone to constitutional challenge as they provide unbridled and uncanalised powers to the executive.
Understanding the ‘vice of excessive delegation’
‘Separation of power’ is a fundamental feature of the Indian Constitution; what this means is that of the three wings – Judiciary, Legislature and Executive/bureaucracy, the law has to be made by the Legislature and implemented by the bureaucracy. Thus, the legislative policy has to be enshrined in the law, which is the statute itself that is made by the legislature (the Parliament) and not in the Rules (or in any other manner) which are made by the bureaucracy. It is well established that essential legislative functions which comprise of the determination of the legislative policy and its formulation as a binding rule of conduct cannot be delegated by the legislature to the bureaucracy. What can be delegated to the bureaucracy is only the task of regulating the procedural aspects of implementation of the legislative policy necessary for implementing the purpose and objects of a legislation; anything more, and the bureaucracy would have impinged in the field of the legislature – which is violative of our Constitution and is commonly referred to as the ‘vice of excessive delegation’.
In case of anti-profiteering, the legislature has given a very vague idea and guidance in the form of Section 171 of the CGST Act. None of the powers of the NAA viz. return of amount, levy of interest, imposition of penalty, cancellation of registration, etc., flow directly from the CGST Act – all these powers flow solely from the CGST Rules.
Thus, de hors 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.
Specifically, the power to cancel GST registration as under the CGST Rules, without any guidance/power for the same in the CGST Act, is wholly discretionary and may also fall foul of the freedom of trade and profession as envisaged under Article 19 (g) of the Constitution.
How anti-profiteering provisions under CGST Act and Rules suffer from the ‘vice of excessive delegation’
In the table below, we have analysed the specific Rules pertaining to anti-profiteering and provided our prima facie comments on whether the said Rule suffers from the vice of excessive delegation or not.
|Provision under CGST Act on anti-profiteering||What the CGST Rules, 2017 provide for||Prima facie comments|
|S.171(1) and (2) – Reduce the price commensurate with reduction in rate of tax or the benefit of ITC and power to examine whether ‘commensurate reduction’ has happened or not.||R.127(iii)(a) – Authority to order reduction in prices||Both the provision and the corresponding rule seem to be in consonance|
|171(3) – The authority shall exercise such powers and functions as may be prescribed||127(iii)(b) – Return the amount along with interest @ 18%||Section 171(3) doesn’t mention anything about interest. Power to levy of interest being an essential legislative function cannot be drawn from Rules – excessive delegation|
|127(iii)(b) – Recover the amount and deposit it in Consumer Welfare Fund||Section 171(3) doesn’t mention anything about recovery of amount. Power to recover amounts from assessees being an essential legislative function cannot be drawn from Rules – excessive delegation|
|127(iii)(c) – Impose penalty as specified in the Act||Section 171(3) doesn’t mention anything about levy of penalty. Power to levy penalty on assessees being an essential legislative function cannot be drawn from Rules – excessive delegation|
|127(iii)(d) – Cancellation of registration under the Act||Section 171 of the CGST Act does not anywhere contemplate the cancellation of registration – such a seriously adverse consequence cannot be imposed on an assessee merely on the basis of Rules – excessive delegation|
|S. 171 as a whole – No guidelines provided for determining the methodology and procedure for ascertaining whether the benefit of reduction in rate of tax or the benefit of ITC has been passed to the recipient||R.126 – Provides that the authority may determine the methodology and the procedure for ascertaining whether the benefit has been passed to the recipient||Essentially, not only is the section completely bereft of any policy guideline for determination of ‘profiteering’, even Rule 126 is also silent and further delegates it to the authority’s discretion. Further, the Rule 126 only talks about the mechanism for investigation – even this Rule doesn’t provide the guidelines/ methodology for ascertaining the factum/quantum of ‘profiteering’ by the supplier, and the same has been left to the discretion of the executive/bureaucracy. This would clearly be a case of excessive delegation|
Thus, anti-profiteering provisions under the CGST Act and Rules clearly suffer from the ‘vice of excessive delegation’ and are vulnerable to be struck down as unconstitutional if challenged before the jurisdictional High Court in an appropriate writ petition.
There are several cases where courts have struck down a legislation, rule or notification in cases of excessive delegation. For example, Sikkim State Lottery Rules imposing a fee of Rs 2,000 per lottery draw on the distributor was struck down (by the Sikkim High Court; later affirmed by the Supreme Court) on grounds of excessive delegation since the parent statute, which is the Lottery Regulation Act, 1998 did not envisage such a fee [Shubh Enterprises v. Union of India; W.P. (C) NO. 41 OF 2013 decided on 14.10.2015]. Similarly, the Madras High Court struck down Rule 3(ee) of the Gold Control Rules, 1969 since it did not contain any guidelines for the licensing authorities to determine “too low a turnover” and the Rule would work differently for different individuals depending upon the particular officer [B. Narasimhalu Chettiar v. Government of Tamil Nadu 89 LW 55].
Given that anti-profiteering provisions under the CGST Act and Rules clearly suffer from the ‘vice of excessive delegation’ and are vulnerable to be struck down as unconstitutional, assessees may explore contesting anti-profiteering investigations at the very inception by challenging the unbridled and uncanalised powers given to the NAA vide appropriate writ petitions before the jurisdictional High Court.
Compiled by GSTstreet for #GSTManthan