ANTI-PROFITEERING: A TOOL TO ENSURE GST’S SUCCESS AS A REFORM OR AN INTERFERENCE

IN FREE ECONOMY

- Srinivas Raman (1144)

Background

The primary objective of the goods and services tax (GST) is to remove the cascading effect of
existing taxes, that is tax on tax. The core principle of the GST is based on the fact that the tax on
any input or input service utilized during the process of developing a product or a service would
have to be offset against the subsequent output tax paid. The seamless credit system has been
formulated keeping the consumer in mind and removes inefficiencies in the supply chain.
However, what if an entity in the supply chain, for instance, a wholesaler, decides to take benefit
of a reduced tax rate courtesy the GST and not pass on such benefit to a consumer by hiking up
his profit?

Overview of Anti-profiteering provisions under GST regime

To counter such undue benefit, the government inserted Section 171 into the Central Goods and
Services Tax Act (CGST). Section 171 of the Goods and Services Tax Act, 2017 (‘Act’ for
short) provides for anti-profiteering measure. Section 171(1) provides that 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. Section 171(2) provides that the Central
Government may, on the recommendations of the Council, by notification, constitute an Authority,
or empowering 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. Section 171(3) provides that the Authority shall exercise such powers and
discharge such functions as may be prescribed. In the Council Meeting held on 18.06.2017 the
GST Council approved the Anti-Profiteering Rules, 2017 (Rules).

Under Rule 7, businesses will have to pass on the benefits of GST to consumers, failing which if
they are found guilty of profiteering, their registration may be revoked. Further, the Authorities
will determine if the benefits have been duly passed on to the recipient and at the same time ensure
to recover the amount not returned if the eligible recipient does not claim such return or if the

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recipient cannot be identified. The standing committee and screening committee are responsible
to affirm if any interested party has a claim.

As under these Rules, the constitution of a National Anti-Profiteering Authority, Standing

Committee, and a state level Screening Committee is duly enumerated. The Authority will have
the power to determine the method and procedure for determining the reduction in rate of tax on
supply of goods/ services or benefit of input tax credit has been passed on by the registered person
to the recipient by way of commensurate reduction in prices. Hereunder, it is the duty of the
Authority, under these Rules to determine whether benefits have been passed to the recipient.

Since the Standing Committee has the onus to identify if the supplier hasn't passed benefits to the
recipient; in such case, the committee shall refer the matter to the Director General of Safeguards
for investigation. The Director General will have to notify the interested parties under these Rules
regarding initiation of any investigation proceeding. Further, the Director General shall complete
the investigation process within a period of 3 months from the date of receipt of reference from
the standing committee. The same may get extended not beyond a further period of 3 months.

As under these Rules, the Director General of Safeguards may seek opinion of any other agency
or statutory authority in discharge of his duties. The Director General is also vested with the powers
to issue summons for any person whose attendance may be necessary to any proceeding. These
enquiry proceedings will be treated as judicial proceedings under the Indian Penal Code. The
Authority within the period of 3 months of receipt of Director General's report, determine whether
benefit should be passed to the recipients or not. As enumerated under these Rules, orders passed
by the authority shall be immediately complied with by the registered person, failing which action
may be taken to recover the amount that was so payable to the recipients including revocation of
registration. The Authority has been provisioned to be in existence for two years unless the GST
Council extends the tenure.

These Rules lay down a 3-step procedure to determine the culpability of an entity. Any compliant
received against an entity will be verified by the standing committee, the findings of the committee
will be investigated upon by the Director General of Safeguards. The Authority will give its final
decision based on the Director General's Letter. The quantum of punishment, if any, will be
decided by the authority. Therefore, it may be noted that every business registered under GST will

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fall under the purview of these Rules if any recipient of benefits makes a claim or compliant against
the registered business pertaining to non-transfer of benefits under GST.

Justification for Anti-profiteering measures

The Government relies on the argument of welfare state based on socialist principles to justify
anti-profiteering measures. These arguments are in accordance with the view of the Supreme Court
of India which has consistently upheld the Government’s role in securing and protecting a social
order which comprises of economic justice as well.

Secondly, anti-profiteering measures are consumer welfare provisions which benefit the
consumers and prevent exploitation by businesses. It also acts to keep a check on unfair pricing
methods adopted by sellers to earn disproportionate profits at the cost of harming consumer
interests.

Thirdly, anti-profiteering measures ensure that benefits under the GST regime are enjoyed by the
society at large. It ensures the ‘trickle-down effect’ whereby all sections of the society are
economic beneficiaries of reduced taxes and the benefit is not monopolized/ abused solely by the
industry.

Against Anti-profiteering measures

The industry at large as well as several analysts have raised their concern over anti-profiteering
provisions and labelled it as a ‘draconian law’ emphasized under the GST command. Apart from
the compliance burden and the scope for abuse of powers under the impugned provisions, the anti-
profiteering provisions have also been termed as ‘unconstitutional’. The arguments against anti-
profiteering laws are as follows:

 Absence of clear cut mechanism for determining anti-profiteering.

 Rules only outline the procedure to be followed for investigation and enquiry and are not
detailed.
 Discretionary powers to bureaucracy to arrive at commensurate reduction under the Central
GST Act. This discretion is highly susceptible to abuse by the Authority.
 Vulnerable to legal challenge questioning 'excessive delegation' by Parliament and
therefore unconstitutional in nature.

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  Lack of clarity on whether de-registered firms can re-commence business and other
practical aspects.

International Experience

India is certainly not the first country to introduced anti-profiteering measures. Similar measures
have been introduced in other jurisdictions following GST regime as well. Australia and Malaysia
are closest international examples when it comes to understanding anti-profiteering measures. The
Australian anti-profiteering measure was based on the net dollar margin rule method – that is, if
taxes and costs fell by $1, then prices should also fall by at least $1. The Malaysian example is
formula-based and uses a net profit margin which considers the effect of net profit on a
comparative basis with a base rate net profit. For instance, the net profit margin from April 1, 2015
to June 30, 2016 (excluding GST taxes) should not exceed the net profit margin as on April 1,
2016 (base rate). Malaysia’s anti-profiteering and price control law in 2011, ahead of its GST roll-
out turned out to be a disastrous move which was counter-productive and finally abandoned.

The current Rules do not contain the methodology and procedure for determining whether
commensurate benefit has been passed on to consumers. However, the language used mostly
mirrors the Australian model. The Rules contain the bare essentials of a statute – with a three tier
structure for determination of alleged anti profiteering –with the apex body being the Anti-
Profiteering Authority. Penal action under the rules can even entail cancellation of GST
registration.

Analysis and Conclusion

In a free competitive market, product prices must be allowed to adjust as a signal to producers and
consumers. As the demand and supply adjusts following the price changes, goods and services will
get to those who want them the most and are willing to pay for them. This is what we called
“willing buyer, willing seller”. The ability to freely and expeditiously adjust any imbalances
between supply and demand will result in fair competition, market efficiency and fair pricing.
Hence, the anti-profiteering measures act as a disruptor in a free economy. However, since India
has been following a mixed-economy model since independence, i.e. an economic system that
allows economic freedom in the use of capital, but also allows for governments to interfere
in economic activities in order to achieve social aims; anti-profiteering measures under the GST

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regime are certainly required. It is crucial that the anti-profiteering mechanism is progressive in
nature in line with the overarching objectives of GST instead of becoming regressive provisions.
Although the Government’s intentions in introducing the anti-profiteering measures are laudable,
it highlights yet another instance of hasty law making in India. The Rules lack much required
clarity which makes the industry uncertain of its application and wary of scope of abuse.

Moreover, the Rules suffer from a more fundamental defect, i.e. the creation of an unnecessary
statutory Authority. India already enacted a Competition Act back in 2002 and created the
Competition Commission to regulate precisely such behavior

The Competition Commission with a mandate to protect the consumer from industry cartelization
has been fully functional for eight years now and has earned a good reputation for itself. Rather
than create yet another regulator, the GST law could have merely conferred referral powers to the
GST Council to refer suspicious cases of price hoarding to the Competition Commission. It is not
hard to imagine how officers of this new “Anti Profit Authority” can raise arbitrary objections to
what they deem is a “fair” price of a certain good or service after a GST reduction and threaten to
levy penalties.

Therefore, in conclusion one can safely say that although anti-profiteering measures are necessary
in the Indian economy in light of the introduction of the game-changing GST regime; the current
Rules are far from perfect and leave much to be desired. Unless these Rules are satisfactorily
modified; they can turn the progressive GST regime into a regressive and draconian system
characterized by uncertainty, corruption and abuse of power by the Authority; thereby adversely
affecting economic growth, trade and ultimately further reducing India’s ranking on the World
Bank’s ‘Ease of Doing Business Index’.