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.