APRIL 22, 2024

 By O P Dadhich, Former Member, CBIC & Ex- DG, DGAP

THE Delhi High Court has recently passed the much-awaited judgement - 2024-TIOL-134-HC-DEL-GST on the constitutionality of the Anti-profiteering provisions under the GST Acts (CGST and SGST). Since there is no provision for any appeal against the orders of the National Anti-Profiteering Authority (NAA) most of the affected parties went to the High Court against its orders. Over 100 Writ Petitions had been filed in the High Court of Delhi against the orders of NAA issued under section 171 of the CGST Act, directing the petitioners to return to the recipients or deposit in the Consumer Welfare Fund the profiteered amount on account of reduction in rate of tax or benefit of Input Tax Credit. The petitioners included many leading FMCG and Real Estate companies including Reckitt Benckiser, Nestle India, Phillips India, Raymond Consumer Care, Samsung, ITC, P&G, Pyramid Infratech, EMAAR MGF etc.

The Section 171 of the CGST Act with identical provisions in the respective SGST Acts is the solitary section dealing with the issue which mandates that any reduction in rate of GST on any supply of goods of services or the benefit of Input Tax Credit shall be passed on to the recipient by way of commensurate reduction in prices . It also lays down the mechanism and hierarchy of forums for examinations of the complaints, investigations and determination of the profiteered amount viz. State Level Committee, National Level Committee, Director General of Anti Profiteering (DGAP) and the National Anti-Profiteering Authority (NAA). The procedural parts are contained in Rules 122 to 134 of the CGST Rules.

The battery of leading advocates representing the petitioners had argued very comprehensively, assailing the constitutionality of the provisions on every conceivable ground and the High Court has examined each of the arguments, albeit some of them too briefly, and upheld the constitutional validity of the Anti-Profiteering provisions. The High Court also observed that there could be cases of arbitrary exercise of power by enlarging the scope of the proceedings without considering the genuine factors such as cost escalation or skewed input credit situations but the remedy for cases is to set aside such orders on the ground of erroneous application of the power and not due to flaw in the law.

No doubt there is nothing in the well-intentioned anti-profiteering provisions which can be said to travel beyond the legislative competence of the Parliament as observed by the Delhi High Court. Moreover, while ushering in such a transformational tax reform, the public at large were to be assured that the new tax regime would not lead to increase in prices, therefore anti-profiteering provisions did serve a purpose. However, if one looks at the anti-profiteering provisions there do appear many overreaching provisions which the High Court should have discussed and directed the government for taking suitable measures. The present write up is an attempt to discuss a few of such provisions.

Price is essentially a function of the market and in a free-market economy the demand and supply only should determine the price over a longer period. When the tax on a product is hiked or reduced there may not be any immediate effect on the price and even if there is, it is not likely to be proportionate to the hike or reduction in taxes. Since the supply chains of goods and services are generally long it takes time to adjust to any change in tax rate or cost of production. However, the Anti-Profiteering provisions mandate this with precision. In the short run the obligation to pass on the proportionate benefit of reduction in tax rate or increase in the ITC might have been desirable under the nascent GST regime but to have such a provision in perpetuity may not be a good tax policy as it militates against the basic price determination system in the free market economy. The High Court observed that it is not proper or feasible to fix any time period for application of the reduced price, as the same has to take effect so long as the direct relation between the reduction in tax rate or the benefit of Input Tax Credit exists and there is no other factor effecting/countering the same. The Court further held that if reduction in tax rate has taken place on a specified date and there are no justified variations in the cost price or other factors for offsetting such reduction in the prices for a particular period of time, clearly for that period a reduced price must govern the transaction.

This scenario looks quite good conceptually but it can never prevail in reality. Tax or no tax, in a competitive market the costs of factors of production and the resultant final goods and services never remain static for long and in an inflationary economy the changes are too frequent. If the AP law is to be complied in letter it would imply that after the NAA passes an order against any business entity every time the it intends to enhance the price, it should approach the NAA for its approval, that too always without any sunset period. Moreover, it is impossible for the NAA or the field formations to determine whether any price hike is on account of increase in cost of production or it amounts to profiteering. Though the law does not lay down any time period within which the proportionate reduction must continue, but there should be a reasonable period of time, say six months, after which the business entity can feel protected from the scrutiny of the authorities into the price mechanism and costing of their supplies.

Another important issue which was perhaps not raised, hence not dealt with by the High court is the point of time for triggering of investigations. Though the NAA has been conferred powers to take a suspected case of profiteering suo motu but almost invariably the process begins with complaint which is first examined by the State Level committee, then by the National Level Screening Committee which then sends it to the DG Anti-Profiteering which investigates into the case and works out the profiteered amount before finally recommending to the NAA for determination of the amount of profiteering and passing final order. Thus, it's basically a complaint driven process but there is no time period laid down for filing the complaint from the date of reduction in tax rate or not passing on of the proportionate ITC benefit. There have been cases where the complaint was lodged after one year of the reduction in tax rate. Taking a normal period of six months for passing of final order by the NAA, the past period for which the supplier has to pay the profiteered amount would be close to two years, and then he has to keep the price reduced for unspecified period. This is not only unfair but also impractical as during this period prices might have changed due to several costing and market factors. There should be a reasonable period of three to six months from the date of reduction in tax rate for initiating the investigation into allegations of profiteering.

The High Court also did not agree with the arguments of the petitioners that the comparison of the taxes levied under GST with a basket of distinct indirect taxes on goods and services before the GST is against the grain, intent and object of the CGST Act. For dismissing this argument, the High Court quoted from the speech of the PM at the time of launching the GST. The GST law was a massive tax reform and tens of indirect taxes viz Central Excise Duty, Service Tax, VAT, Sales Tax, Octroi, Luxury Tax, Entertainment tax etc. levied by the centre and states were subsumed into the GST rates, comprising identical Central and State GST rates. While fixing the GST rates very extensive exercise was undertaken to analyze the total incidence of taxes on every good(s) and service(s) and the CGST and SGST rates were fixed in such a way as to retain the total incidence of tax at the same level, barring minor variations due to adjustments and approximations. However, once the rates were fixed it cannot not be subject to challenge on the ground that the total incidence under GST was higher than the total central and state taxes in pre-GST regime, as levy of tax is a legislative prerogative and fixing effective rate is generally within the delegated powers of the executive. Moreover, there is no such intention in the Object or Preamble of the CGST Act or under any of the provisions of the Act declaring that on introduction of the GST, if the total incidence of the GST is higher than the total indirect taxes suffered earlier on any goods or services, or the Input Tax Credit available under the GST regime is higher than the credit available under pre-GST regime, the action under anti-profiteering provisions may be initiated. Therefore, the AP provisions under section 171 of the GST Act and the Rules from 122 to 134 should be invokable only when there is reduction in tax rate or increase in ITC within the GST system without comparing the tax rate or available ITC with the pre-GST regime. However, most of the investigations pertaining to real estate sector pertain to higher availability of ITC under GST regime.

Therefore, it is felt that in spite of a very reasoned and comprehensive judgement by the High Court certain aspects of the Anti-Profiteering provisions still need greater and deeper examination and determination. It is hoped that the Supreme Court would look into these issues in the SLP filed against the High Court order. It is also a point to ponder over whether the AP provisions should be continued as these provisions were essentially a temporary measure to allay the fear in the public that the GST may lead to price rise which has not come true and now the GST regime has stabilized. Afterall there were no such provisions under the erstwhile Central Excise, Service Tax or state VAT laws. Moreover, after the large-scale reduction of GST rates on several goods and services in July 2018, there has not been any such reduction in rates which are now fairly stable. Most of the orders of the NAA which were under challenge before the High Court pertain to that period and those goods and services.

[The views expressed are strictly personal.]