• Notification Date: 23-02-2024
• Notification No: N/A

GST Laws: Details about the Row over ‘Profiteering’

The Goods and Services Tax (GST), due to its comprehensive nature, and embedded facility of seamless credits to businesses for input taxes, was supposed to have a sobering effect on prices. The government is keen the benefits of any reduction in tax rate and input tax credit for businesses reach the final consumers by way of a commensurate reduction in the prices of then relevant goods and services. 

To be precise, Section 171 of the CGST Act says any wilful action of not passing on these benefits to the recipients will be treated as “profiteering”. Chapter XV of the CGST Rules, 2017 contains the detailed procedure for this, and National Anti-Profiteering Authority (NAA) was set up in 2017 with the mandate to implement it. The NAA, however, hasn’t been very effective in recovering the amounts clocked by firms via profiteering, and it was dissolved in December 2022. Since then, the Competition Commission of India (CCI) has been dealing with the cases of profiteering. 

Delhi High Court Judgment: 

On January 30, 2023, the Delhi High Court upheld the relevant sections of the CGST Act and rules pertaining to anti-profiteering. Precisely, Section 171 of the CGST Act has been upheld, along with rules 122, 124,126,127, 129, 133 and 134 of the CGST Rules. The HC ruled that the anti-profiteering provisions are not a “price-fixing mechanism” and do not violate Article 19 or Article 300A of the Constitution. 

The judgement was a setback to over 100 companies, including Hindustan Unilever, Nestle, Patanjali, Excel Rasayan and Philips, who had received recovery notices from NAA and petitioned against the validity of the provisions. The companies had challenged the constitutional validity of anti-profiteering provisions on the basis of a lack of formula for determining profiteering. 

The court, however, held that no formula can be enacted to determine anti-profiteering, and noted that any reference to anti-profiteering provisions of Australia and Malaysia are “misconceived”. 

Petitioners’ Other Contentions: 

The Companies contend that the anti-profiteering provisions are “manifestly arbitrary” as there is no methodology to determine the quantum of profiteering. Also, no time limits are prescribed for the profiteering provisions which poses difficulties for them, as the consequential effect is price regulation for an undefined period. 

Rakesh Upadhyaya, MD at Excel Rasayan, apprehends that “anti-profiteering measures will hit businesses as they intend to regulate product prices”. “We kept the prices competitive and passed on the maximum benefit to our consumers. It is with this principle that we had not increased the price of the products when the transition happened into the GST regime,” Upadhyaya added. 

Amit Maheshwari, tax partner, AKM Global, says, “If there’s no clear way to figure out how much profiteering is happening, companies could find it tough to spot and deal with it properly. In such situations, they will need to compare their prices, costs, and profits before and after any changes in GST rates.” 

If Supreme Court Upholds the Norms: 

If the Supreme Court upholds the HC ruling, the companies who have been subject to these proceedings could be compelled to reimburse any “excessive profits” cornered due to non-compliance with the anti-profiteering regulations. 

The reimbursement would cover the disparity between the prices charged before and after any alterations in GST rates, or could be adjusted for changes in input costs. 

“The companies may also incur monetary fines, potentially reaching up to 10% of the profiteered sum as per Section 122 of the CGST Act,” says Maheshwari. Interest could be levied too on the profiteered amount, calculated from the date of collection until repayment is made. It could also open doors for the GST authorities to look into the affairs of other businesses as well for similar misconduct. 

Ankur Gupta, practice leader – Indirect Tax at SW India says that after the NAA was dissolved in December 2022, the CCI has been tasked with overseeing matters related to price reductions resulting from tax rate cuts or ITC enhancements. “While NAA authorities possess specialised knowledge of GST provisions, CCI authorities lack such expertise,” he says.