[2019] 101 taxmann.

com 354 (Article)

Date of Publishing: January 9, 2019

Anti-Profiteering provisions under GST

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N.K. GUPTA GAURAV GOYAL

Sr. Executive Director - S S Kothari Mehta & Co. CA

1. Introduction

1.1 GST has become a substantial part of day-to-day affairs of any business organisation in India.
Despite facing a few hiccups, all the process and procedures in GST are getting streamlined. One of such
procedures is the anti-profiteering measure covered in the GST Law.

GST is not a new concept in the Global economy. Many countries have adopted it decades ago. The
main concern that arose at the time of GST implementation in all those regions, was the sudden spurt in
the inflation that almost distressed the whole purpose of GST implementation. The primary reason for
the said inflation is the profiteering that arose due to GST.

Anti-profiteering has been considered as an ethical practice in India but the introduction of GST has
made it a statutory mandate to exercise it. By taking lessons from the global hiccups, anti-profiteering
measures have been inserted in the Indian GST Law. The real question is how feasible are these
provisions in their practical implementation? We will try to find out solution in the following paras.

We will classify the whole issue in 3 parts:

(a) Tax benefits required to be passed on

(b) Key practical challenges
(c) Subordinate legislation cannot exceed the scope of the parent act-Feasibility Study

2. Benefits required to be passed on to consumer

2.1 The statutory provisions regarding anti-profiteering measures have been prescribed in the Section
171 of the CGST Act 2017. The same is being reproduced 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 prices 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."

2.2 What has not been mentioned in the above provisions are as much important as that has been
written. First, let's cover the later one; the former part will be covered in the feasibility study thereafter.
The statutory provision specifies that in order to comply with the requirements of anti-profiteering, a
business needs to pass on the following tax benefit to the consumer:

(a) Reduction in rate of tax:

The tax benefit that has to be passed on to consumers, must be derived from the
reduction in rate of tax of outward supply.
E.g., M/s. ABC. Ltd. was selling a product at the rate of Rs. 100 per piece (inclusive
of taxes) prior to GST. The effective rate of taxes (Excise and VAT) which was
applicable on the product was at 26%. Now, the product has been classified under
the 18% GST bracket. But company continues to sell its product at the same rate of
Rs. 100 per piece, despite the reduction in tax rates. Now, the said provision will be
applicable to the company, unless proved otherwise by the company that the reason
for the consistent pricing was increase in cost or any other factor. The notices being
issued these days by the Anti-profiteering authority to some marque brands are due
to this clause.
(b) Benefits due to additional eligibility of ITC which was not available earlier:
One of the central themes of the GST law is the seamless flow of credit throughout
the value chain. Earlier, there was cascading effect of taxes prior to GST. However,
ITC of most of the goods or services is available to the taxable person under GST law.
Due to this excess eligibility of ITC on inward supplies, there would be expansion of
margins of the businesses. GST law wants to hit exactly at this sweet spot that this
benefit is directly linked to the applicability of GST and it will be necessary for the
taxable person to pass on these benefits of excess eligible ITC to the customers.

2.3 Apart from the above two points, GST law is silent on other benefits, whether directly or indirectly
arising due to GST applicability. Following are some of the examples of the same:

(a) Reduction in the prices of inward supply of goods or services

(b) Benefits due to faster transportation of goods (either low pricing or faster delivery)
(c) Advantage to organised sector in comparison to unorganised player in terms of
higher turnover and margins

3. Key issues faced by the companies in passing on the benefits of GST

3.1 A number of practical complications are being faced by the companies in complying with the
provisions of anti-profiteering provisions. Some of those issues are being highlighted below:

3.2 Eligibility of ITC against the cost of CST

- CST @ 2% or at higher rate was applicable on the inter-state purchases of goods. However, the credit
was not available regarding the same. Since CST has been subsumed in the GST and full rate of GST is
applicable on inter-State purchases, it is a benefit being generated on account of input tax credit under
GST. But the matter is not that simple to compute as it seems. Let's take an example:

E.g. M/s. ABC Ltd. is in business of manufacturing and selling a product, named 'X' with follow details:
 Sale price: Rs. 100
Cost of Goods Sold: Rs. 70
Cost of Raw Material being purchased on CST (in earlier regime): Rs. 20
Benefit on account of additional ITC availability under GST: Rs. 20*2%= Rs. 0.4
Total GST Rate applicable on such item: 18%
Interest Rate: 12%
Working capital cycle: 3 months
Working capital blockage: Rs. 20*18% GST *12% interest *3/12 (time) = Rs. 0.11 approx.
Total benefit on account of GST= 0.40-0.11= Rs. 0.29

We can see that the additional, credit benefit generated by M/s. ABC Ltd. is only 0.29% of its final sale
price, which is very negligible as well as difficult to be passed on to each and every customer.

We know that the benefit may be higher or lower in some specific cases. But the problem in above cases
is how to handle the anti-profiteering notices.

3.3 Higher cost for opening stock procured prior to applicability of GST - Another issue
relates to stock lying with all the companies as on 1-7-2017 in order to keep them operational. The taxes
and their credit admissibility on those goods were under the prior tax regime. CST was applicable on
some of the said stock procured inter-State in the earlier regime and credit of CST was not available
against the transaction. Now, when the taxable person will be selling those goods under GST, how it is
supposed to pass on the benefits of eligibility of credit against inter-State purchases where old stock was
already lying with him.

This issue is huge for the industries where stock levels are very high, i.e., Steel industry, paper industry
or capital goods sector, etc.

3.4 Reduction of GST rates where credit is denied - Earlier, GST rate on restaurants was
applicable @ 18% subject to the availability of ITC. Sometimes back it has been reduced to 5% subject to
non-availability of ITC. However, denial of ITC led to substantial increase in the cost. Even without
considering this very point, some top notch restaurants were slapped with the profiteering notices
recently.

3.5 Anti-profiteering provisions-Applicable product wise or company-wise? - Now, this

question is a gem which has been left unanswered under the statutory provisions. Suppose a company
dealing in 10 types of products has gained some GST benefits on one of its product but there are losses
to it on remaining 9 products. Whether the said section-171 will be applied product wise or company-
wise? No answer to this question is found so far.

4. Subordinate legislation cannot exceed the scope of the parent act and 'Vice of excess
Delegation'
4.1 'Trias Politica' principle is a model for the governance of a nation (also popularly referred to as
'State'). This is based on the principle of 'Separation of Power' whose basic theme is the distribution of
political power. Bipartite and tripartite governmental systems are the examples of the said principle of
'Separation of Power'. The Spirit of the Laws (1748), Montesquieu described the various forms of
distribution of political power among a legislature, an executive, and a judiciary. Indeed the same is the
example of tripartite governmental system or principle of 'Trias Politica'. On the other hand, bipartite
system has only two branches.

4.2 Governance of political power in India is based on the 'Tripartite governmental system'. As to the
very nature of the said system, legislature, executive, and judiciary are its three branches, performing
different functions. The theory of Separation of Powers confers that all the said three branches of the
government should be separate from each other. This principle has the following three legs to it:

(a) One branch must not interfere with the working of the other branch;
(b) One branch must not exercise the functions conferred on other branch; and
(c) All the three branches must have separate persons involved in performing functions
conferred on them.

4.3 The above legs are not applicable in its entirety in the Indian context. It is because there are certain
functions of all the three branches that are exercised by the other branch to a limited extent as
prescribed in the Indian constitution. But all other functions are to be performed as specified in the
Constitution.

4.4 In the Indian context, Legislature, i.e., the Parliament and the State Assemblies, make the law;
executive branch, i.e., bureaucrats/boards/agencies, are responsible for the implementation of law as
passed by the legislature; and judiciary interprets or reviews the law. Accordingly, we can say that a
statute is made by the legislature and not the executive body. Essential functions or parts in relation to a
law must be made by the legislature and executive agencies are responsible for successful
implementation of such a statute.

4.5 Pursuant to the foregoing, essential legislative policies and their formulations must be made by the
Parliament itself. It is only the procedural part that is to be left for the executive body or the
bureaucracy; otherwise the same would tantamount to the interference of the executive body in the
functions of the legislature, as prescribed by the Indian constitution.

4.6 Further, a statute is a legislative function and rules are the procedural parts for the proper
implementation of the statute. Moreover, as per the verdicts of the various High Courts, as ratified by
the Supreme Court, subordinate legislation (rules) cannot exceed the scope of the parent Act. What has
been exercised through the rules must be powered by a statute. Otherwise the same shall be
unconstitutional owing to the 'vice of excessive delegation'. The principle interprets that a statute
cannot delegate the excessive power to the rules which are the essential functions of the statute itself.

4.7 In continuation of the above, whether Section 171 of the CGST Act and rules made thereunder come
in the nexus of 'vice of excessive delegation' or not, is required to be analysed. Section 171 deals with the
matter of anti-profiteering measures. Pursuant to this, an authority named 'National Anti-Profiteering
Authority' (in short 'NAA') has been formed by the Government to examine the issues in relation to
profiteering mentioned under the CGST Act. The said section has been already discussed in the earlier
paragraphs. Now, Rule 127 of the CGST Rules 2017, in relation to anti-profiteering, has been
reproduced here after:

"It shall be the duty of the Authority,-

(i) 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 prices;
(ii) 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 prices;
(iii) to order,
(a) Reduction in prices;
(b) Return to the recipient, an amount equivalent to the amount not passed on by way of
commensurate reduction in prices along with interest at the rate of eighteen percent
from the date of collection of the higher amount till the date of the return of such
amount or recovery of the amount not returned, as the case may be, in case the eligible
person does not claim return of the amount or is not identifiable, and depositing the
same in the Fund referred to in section 57;
(c) Imposition of penalty as specified in the Act; and
(d) Cancellation of registration under the Act.
(iv) to furnish a performance report to the Council by the tenth of the close of each quarter."

4.8 After reading and analysing Section 171 of the said Act and the foregoing rule 127, we can say that
most of the powers of the NAA have been granted by way of CGST Rules and those powers do not have
any corresponding mention in the Section 171 of the CGST Act. The powers to order 'Return to the
recipient along with interest', 'Recovery of amount and deposit it into Consumer Welfare Fund',
'Imposition of penalty' and 'Cancellation of GST Registration' are not specifically mentioned in the
CGST Act. These are the essential legislative functions. it is the Parliament which should have decided
the actions that have to be taken in case the profiteering is found, by way of including it in the CGST
Act, and not it to be at the discretion of the executive body, i.e., CBIC board.

4.9 Further, details regarding process or methodology to compute profiteering have neither been
defined in the CGST Act nor in the rules. Hence, the same have been left at the discretion of the
investigating officers to decide the computation/quantum of profiteering.

4.10 Both of the above, being an excessive delegation of power to the GST rules, stand unconstitutional.

Looking to the business community, in case of B2B transaction, tax burden is not there as credit is
transferred from one taxpayer to another taxpayer. The issue will be raised by the consumer, who is
consuming the goods. It means that last person of the business who will charge the Consumer. Can the
anti-profiteering provision be applied on the first person supplying to goods to another person in
business who simply takes credit of the taxes paid by the first person. In our opinion, we can not. This
has happened in the case of HUL.

5. Concluding Remarks
5.1 Despite being for the benefits of ultimate consumers, these provisions have more or less become a
major hurdle for the business organisations. A few of them are not able to compute the benefit passable
to the consumers or benefits are too small to be measured and passed on. Let alone the difficulties, anti-
profiteering provisions are even not statutorily feasible as discussed above. Sooner or later, these
provisions are going to be challenged on the basis 'vice of excessive delegation'.

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