The Constitution (101st Amendment) Act, 2016 introduced the Goods and Services Tax (GST) regime in India, which is a comprehensive indirect tax on manufacture, sale or consumption of Goods and Services.
2. Introduction:
The Constitution (101st Amendment) Act, 2016 introduced the Goods and Services Tax (GST)
regime in India, which is a comprehensive indirect tax on manufacture, sale or consumption
of Goods and Services. It subsumed all indirect taxes levied on Goods and Services, except
Entry tax, Toll tax and Octroi. In implementation of the 101st Constitutional Amendment,
Central Goods and Services Tax Act, 2017 (CGST Act), Integrated Goods and Services Tax Act,
2017 (IGST Act) and the respective State Goods and Services Tax Act(s), 2017 (SGST(s)) were
enacted. The rationale behind introducing the GST legislation was to impose a multi-stage tax
regime wherein each point of supply chain is taxed. GST sufficiently fulfils the description of a
tax based on value addition (and to such extent, it is in line with the VAT laws); obviating the
cascading effects of taxation, which conventional tax regimes perpetuated.
3. Though the erstwhile regime in the form of various State VAT
legislations recognised the principle of value addition-
based consumption taxes; however, loopholes/gaps existed
in those legislations; for instance, there was no effective
mechanism to monitor whether any reduction in the rate of
tax on any supply of goods or services resulted in
consequent reduction in the prices of such goods or
services, to the consumer. In fact, as per the CAG Study
Report of June 2010, various manufacturers did not reduce
the MRP after the introduction of VAT though there was a
substantial reduction in tax rates.
4. Therefore, to address the concern, Anti-profiteering provisions were introduced in the GST law, to
ensure that any reduction in the rate of tax on any supply of goods or services or the benefit
of Input Tax Credit (ITC) is passed on to the consumer, by way of commensurate reduction in
prices. It is relevant to note that in the first draft of Model GST law there was no provision for
anti-profiteering and it was only in the subsequent, revised Model GST law draft which came
in force in November, 2016, Anti-profiteering provisions were incorporated under Section
163 of the Model GST Law. In fact, Section 163 of the Model GST Law underwent various
changes based on the GST Council’s recommendations and finally, Section 171 of the CGST
Act together with Rules 122 to 137 (Chapter XV) of the CGST Rules were incorporated,
forming the statutory regime for Anti-Profiteering provisions under the GST law.
5. Statutory framework of Anti-Profiteering under The GST Law: Section 171 of the CGST Act
requires that any reduction in rate of tax on any supply of goods or services or the benefit of
ITC, is to be passed on to the recipient by way of “commensurate reduction in prices”. For
ensuring compliance, a new Authority was to be constituted, or an existing Authority was to
be empowered. For this purpose, the Union Government constituted the National Anti-
profiteering Authority (NAA) as a Nodal agency to ensure compliance of Anti-Profiteering
provisions under the GST law. Chapter XV of the CGST Rules, 2017 lays down the procedure
for implementing Anti-profiteering provisions under the GST law. Per Rule 123, a Standing
Committee will examine the veracity of any complaint and if it is satisfied that prima-
facie the manufacturer/ supplier has not passed on to the recipient by way of commensurate
reduction in prices, the benefit of any reduction (a) in the rate of tax on any supply of goods
or (b) services or (c) the benefit of ITC, it shall refer the matter to the Director-General of
Anti-profiteering (DG) for detailed investigation.
6. REASONS WHY ANTI-PROFITEERING PROVISIONS UNDER THE GST LAW ARE UNCONSTITUTIONAL:
Reason 1: Anti-profiteering provisions are Ultra vires of Article 246A of the
Constitution
Article 246A of the Constitution makes special provisions with respect to Goods and
Services Tax. It empowers Parliament and the Legislature of each State to make
laws with respect to Goods and Services Tax imposed by Union or by such State.
Article 366(12A) defines ‘goods and services tax’ as any tax on supply of goods, or
services or both except taxes on the supply of alcoholic liquor for human
consumption.
Therefore, Article 246A of the Constitution empowers only Parliament and the
Legislature of every State to make laws with respect to tax on supply of goods, or
services or both and nothing else and the statutes framed in exercise of such
power (CGST Act, SGST Act and IGST Act) must strictly conform to what is
permitted. There is no plenary or residuary power as in case of Entry 97[1] of List
III of the Seventh Schedule of the Constitution, to justify any provision which
strictly does not conform to the scope of Article 246A.
7. Anti-profiteering provisions under the GST law ( although part of taxing statute), do
not impose any tax or create a charge of tax. It only requires commensurate
reduction in prices of goods or services on account of reduction in taxes or benefit
of ITC. Therefore, by way of a taxing statute imposition of tax or charge of tax can
be regulated, but determination of price or charge on price cannot be regulated
since prices are determined on multiple factors, like demand and supply, product
mix, market share, geography, market segmentation etc. and taxes may not be the
determinative factor to determine prices.
Anti-profiteering provisions would have to fall under Entry 34[2] of List III of the Seventh
Schedule of the Constitution; however, the GST laws are not framed under the said Entry.
Therefore, Anti-profiteering provisions under the GST law are beyond the scope of Article
246A of the Constitution. Article 246A provides for a right to create a charge of tax,
machinery to collect such tax and consequences of non-payment of tax but does not cover
regulation of prices. It is relevant to note that regulation of prices is totally different from the
power of taxation and the power to regulate price, cannot cannot be incidental or ancillary to
the power to tax, or to enforce taxation & rebate(s), to be passed on. Hence, Anti-
profiteering provisions under the GST law are ultra vires of Article 246A of the Constitution.
8. Reason 2: Constitution of NAA is contrary to law:
As per Section 171(2) of the CGST Act, the Union Government may, on
recommendations of the GST Council, by notification, constitute an Authority
to examine whether ITC 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. In terms of Section 2(80) ‘notification’ means a
notification published in the Official Gazette.
Therefore, as per Section 171 of the CGST Act, the Authority must be constituted
by way of a notification published in the Official Gazette. In this regard, the
Union Government constituted NAA as nodal authority to ensure compliance
of Anti-Profiteering provisions under the GST law. However, the Central
Government has constituted the NAA by way of Office Order No. 13/1/2017
Ad.1 dated 28.11.2017 and not by way of a notification published in the
Official Gazette.
9. It is apposite to note that it is a settled position of law that when a power is
conferred to do a certain thing in a certain manner, such thing must be
done in that manner only or not at all, and all other methods of
performance are necessarily forbidden. Therefore, when a statute has
conferred a power to do an act and has laid down the method in which
such power has to be exercised, it necessarily prohibits the doing of such
act in any other manner than what has been prescribed[3].
Hence, the constitution of the NAA by way of an Office Order and not by
way of a Notification published in the Official Gazette is contrary to the
law laid down by Parliament.
10. Reason 3: Anti-profiteering provisions are ultra vires to Articles 14 and 19(1)(g) of the
Constitution:
As per Article 14 of the Constitution, a cause of invalidity arises where equals are
treated unequally, and unequals are treated as equals. The Hon’ble Supreme Court in
Federation of Hotel & Restaurant Assn. of India Vs. Union of India[4] has held that tax laws
are not outside the purview of Article 14 and while examining the allegations of
discriminatory treatment under tax laws, what is inquired is not the phraseology used, but
the real effect of the discriminatory provisions, which are stated to be discriminatory.
In the above context, the real effect of the Anti-profiteering provisions under the GST law is that
it creates discrimination between two similarly placed entities i.e., an entity dealing in goods
or services where the tax rate has been reduced and another entity dealing in similar goods
or services where the tax rate has not been reduced. By virtue of the Anti-profiteering
provisions, the former entity where the tax rate has been reduced is placed on a constant
vigil to maintain a lower price and not increase the price for an undefined future period,
(which could be 8 months to 22 months or more) irrespective of any change in cost factors.
On the contrary, for the latter entity, there is no such obligation to freeze the price for an
undefined future period. The latter entity can decide the prices of its goods or services as per
the prevailing market conditions, whereas the former cannot do, and if price is increased say
even after a year, it is treated as profiteering under the GST laws, by the DG & NAA.
11. Therefore, by virtue of the Anti-profiteering provisions, two equal entities are treated unequally
violating Article 14 of the Constitution. Further, Anti-profiteering by way of a price control
mechanism hampers the freedom to practise any profession or carry on any trade, business or
occupation, as guaranteed under Article 19(1)(g) of the Constitution. Hence, Anti-profiteering
provisions are ultra vires to Articles 14 and 19(1)(g) of the Constitution.
Reason 4: Anti-profiteering provisions are uncertain, vague and unintelligible:
The manner in which Section 171 of the CGST Act has been drafted is uncertain, vague and
unintelligible; therefore, it is open to diverse & even contradictory constructions. Section 171 vests
unbridled, uncanalised and arbitrary powers on the Executive. The Hon’ble Supreme Court in
Harakchand Ratanchand Banthia Vs. Union of India[5] has held that a statute must be definite and
not uncertain, ambiguous or vague.
Section 171 is based on a wrong presumption that a reduction in rate of tax, will result in an equivalent
reduction in prices. Firstly, reduction in rate of tax do not mean similar reduction in rate of tax of all
raw materials used in manufacturing the product whose tax rate was reduced. Second, prices are
decided based on multiple factors, increase in raw material & packaging procurement cost & GST
on raw materials, labour cost and other costs, including raise in power, fuel etc., transportation,
exchange rate hike etc. Mere decrease in GST rate on the output, would not translate to
corresponding decrease in sale price of output. Therefore, the fundamental presumption under
Section 171 that, every tax reduction must result in corresponding “price reduction” is erroneous.
