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GST Anti- Profiteering clause

Specific provisions on Anti- profiteering have been legislated in Goods and Service Tax GST law. The anti- profiteering provisions are inherently designed to protect consumer by restricting the companies to benefit unjustly on account of any reduction in GST rates or enhancement in tax credit pool.
CA Nitish Agnihotri

Introduction

Specific provisions on Anti- profiteering have been legislated in Goods and Service Tax “GST” law. The anti- profiteering provisions are inherently designed to protect consumer by restricting the companies to benefit unjustly on account of any reduction in GST rates or enhancement in tax credit pool.

Statutory Provisions of Anti- Profiteering Measure

As per Section 171 of CGST Act:-

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.

Objective of Anti- Profiteering Measure

Section 171 of CGST Act, 2017 provides that it is mandatory to pass on the benefit due to reduction in rate of tax or Input Tax Credit “ITC” to the consumer by way of commensurate reduction in prices.

Constitutional Validity of Anti- Profiteering Measure

Article 301 of Indian Constitution provides freedom of trade, commerce and intercourse throughout the territory of India. However, Article 302 authorizes parliament to Impose reasonable restrictions.

Implication on State Tax/ Assessees- It is pertinent to note that power to constitute authority u/s 171 is with central government only. Article 302 also authorizes Parliament to impose such restrictions, whereas there are stringent conditions for state legislatures to impose such kind of restrictions under Article 304.

In such a scenario implementation of Anti Profiteering measures in respect of – State Tax (i.e. SGST) administered by any Govt. or Registered Persons, under State Jurisdiction for all taxes may be subjected to judicial review.

The Constitution does not envisage any general limits on the right of a businessman to earn profits, except “reasonable restrictions” in public interest. Hence, a businessman has the fundamental right to make a “reasonable margin of profit”. There can be several situations in which the GST “anti-profiteering” mechanism can fall out of this fundamental right.

However, wherever the circumstances so justify, the same has been treated as a reasonable restriction.” Therefore, depending on circumstances, laws have always provided for regulating prices and other business practices.

The GST “anti-profiteering” mechanism aims to regulate prices of all goods and services irrespective of circumstances. This makes the scheme unprecedented and quite clearly unconstitutional. It even contains stringent penalties. The government may believe that GST should lower inflation. If a policy doesn’t achieve intended results, they then cannot be brought about through penal laws.

The Anti- Profiteering Authority

The Authority shall consist of-

(a) A Chairman

(b) 4 Technical Members (Commissioners of State/Central tax)

The Authority will determine the method and procedure for determining whether the reduction in rate or the benefit of input tax credit has been passed on by the seller to the buyer by reducing the prices.

Duties of National Anti- Profiteering Authority

As per Rule 127 of CGST Rules 2017, Anti- Profiteering Authority shall be duty bound:-

1) To determine whether any reduction in the rate of tax on any supply of goods or services or the benefit of input tax credit has been passed on to the recipient by way of commensurate reduction in price.

2) To identify the registered person who has not passed on the benefit of reduction in the rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in price.

Orders of the National Anti- Profiteering Authority

As per Rule 133 of CGST Rules 2017, the Authority may order-

1) Reduction in prices.

2) Return to the buyer, the benefit amount not passed on along with 18% interest p.a.

3) Payment of penalty and

4) Cancellation of registration

Tenure of National Anti- Profiteering Authority

The Authority will exist for 2 years from the date on which the Chairman enters upon his office unless the Council recommends otherwise.

Recent incidents of Anti- Profiteering move

Government of India has already issued few notices to enforce this anti- profiteering law. Notice have been issued to Hindustan Unilever Limited, a particular Honda dealer, Hardcastle Restaurants, McDonald’s franchisees for West and South India and retailer Lifestyle.

HUL has earmarked Rs. 119 crore in the December quarter to be paid to the government because it could not immediately lower prices after GST on several products was reduced from 15th of November. The company has offered to release the money to the Consumer Welfare Fund, run by the department of consumer affairs. In response, the authority has sought clarifications from HUL on the methodology used to arrive at Rs. 119 crore that the company offered to the government.

Now, other large companies are also considering making similar provisions with appropriate documentation as HUL because they were also unable to cut prices immediately following the GST reductions.

In its first order on anti-profiteering under goods and services tax (GST), the National Anti-Profiteering Authority (NAA) has dismissed the complaint against Vrandavaneshwaree Automotive Pvt Ltd, a Bareilly-based Honda car dealer, by concluding that it did not contravene the anti-profiteering provisions of the CGST Act.

Conclusion

From Consumer’s point of view Anti Profiteering Provision is necessarily required to be there so as to ensure deserving benefit is passed on to them. At the same time, looking at the issues and challenges before industry and the efforts involved in reworking of cost sheet and re-fixing of prices, it is advisable that:-

i. A reasonable bandwidth for margin variation should be prescribed, say for example variation upto 10% of existing margins. If variation remains within such bandwidth, no registered person should face any penal consequences u/s 171 of the CGST Act.

ii. A threshold limit for turnover of taxable supplies may be prescribed, below which provision of sec. 171 shall not apply.

iii. Further for above threshold limit, detailed rules, covering all aspects including computation mechanism, documents to be maintained etc, should be prescribed so that no discretionary power is left in hands of any authority which in turn can cause harassment of the tax payer.

(Author is associated as Consultant with Dewan P.N. Chopra & Co.)

View Comments (1)

  • Nice write up. Lot of managements, not aware about the anti-profiteering clause.

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