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Can GST's anti profiteering rule be deemed unconstitutional? - GST Station

Can GST’s anti profiteering rule be deemed unconstitutional?

The government’s aim behind bringing the anti profiteering rule was to primarily reign the possibility of inflation after GST rolls out, but the hastily drafted rules have proved to be contentious and may even be unconstitutional.

Section 171 of the CGST Act (and the corresponding provisions of the state GST Acts) creates the obligation on businesses to pass on to the recipients any reduction in the rate of tax or the benefit of input tax credit by way of a commensurate reduction in prices.

The full guidance of what constitutes a commensurate reduction, what are the parameters you would go by, mitigating factors, check and balances, penal provisions among others need to be in the CGST Act itself. In the current form, the anti profiteering rules give everything a miss.

However, the problem is that there is hardly any guidance on what is commensurate reduction under the Anti-profiteering section/rules. The rules prescribe an administrative framework for administering anti-profiteering and stringent punishments, but no guidance on what will constitute ‘profiteering’. The problem does not end there.

“Separation of power is a fundamental feature of the Indian Constitution – What this means is that of the three wings – Judiciary, Legislature and Executive, the law has to be made by the Legislature and implemented by the bureaucracy. This means that the legislative policy has to be enshrined in the law, which is, the statute itself that is made by the legislature (the Parliament) and not in the Rules (or in any other manner) which are made by the bureaucracy. In the case of anti profiteering,the legislature has given a very vague idea and guidance in the form of Section 171 of the CGST Act. If you look at this section, it does not talk about any penalty. It merely says you will pass on the benefit of commensurate reduction,” says Advaita Legal, Partner, Sudipta Bhattacharjee.

This means that it will be the bureaucrats who will form the screening committees and the anti-profiteering authority, who will in turn decide using their own discretion what commensurate reduction is. “It is on this wholly discretionary basis without any legislative guidance that there can be a penalty, which can be as draconian as cancellation of registration. Cancellation would essentially be asking the company to pack up its business. For such a severe consequence you cannot leave matters to the discretion of a bureaucrat,” says Bhattacharjee.

Kumarmanglam Vijay, Partner, J Sagar Associates, however, says as the overall intent of the legislation is to facilitate rather than obstruct the business, “even in extreme cases Authorities are likely to impose pecuniary penalties rather than cancel registration of the offending party”

What the law says?
In law, such scenarios are referred to as “excessive delegation”, which can be a death knell for Rules/Statutes. We have several cases where courts have struck down a legislation, rule or notification in cases of excessive delegation. For example, in a recent decision, Sikkim State Lottery Rules imposing a fee of Rs 2,000 per lottery draw on the distributor was struck down (by the Sikkim High Court; later affirmed by the Supreme Court) on grounds of excessive delegation since the parent statute, which is the Lottery Regulation Act, 1998 did not envisage such a fee.

“Further, according to law, a penalty has to be prescribed in the main statute/Act itself – at the very least, the Act has to envisage a penalty and the procedural aspects can then be prescribed through the rules. However, in this case the CGST Act does not talk of any penalty, but in the rules, this has suddenly been introduced,” says Bhattacharjee. A court of law would go in-depth to come to a conclusion, but legal experts are of the opinion that in its current form, the anti profiteering rules may be struck down. “Excessive delegation will mean the anti-profiteering rules are unconstitutional and can be struck down by a court of law,” says Bhattacharjee.

“The anti-profiteering laws are intended to ensure that benefits of GST are passed on to the consumers and not ‘profiteered’. There are two types of benefits – reduction owing to tax credits available to the seller and reduction in price passed by his suppliers owing to the credits available to him. While the GST law requires that benefits arising out of tax credits to be passed on by the seller, it does not strictly require passing on the benefits arising out reduction in sale price by his supplier. This is likely to create a ground for substantial dispute and eventually defeat the spirit behind this law,” says KPMG, Partner, Priyajit Ghosh.

In a conversation with ET Now, Revenue Secretary Hasmukh Adhia on Tuesday said there should be no concern about harassment in the name of anti-profiteering. “…the concern should not be there with the companies because it is a tool which is meant only for big people in whose case it is quite clearly proven that they have not passed down the benefit of input tax credit or reduction in the tax rate. So it is only in those very few cases of big companies where they need to worry about it. We are not going to use anti profiteering for small shops and retailers as to why somebody has not reduced the price of soap because that is taken care of by competition,” said Adhia.

However, concerns remain, especially since it looks like in the absence of any guidance, the anti profiteering rules may be used retrospectively.

The full guidance of what constitutes a commensurate reduction, what are the parameters you would go by, mitigating factors, check and balances, penal provisions among others need to be in the CGST Act itself. In the current form, the anti profiteering rules give everything a miss.

“Assessees have a right to know about the boundaries, when non-compliances can lead to such adverse consequences. In Australia, for one year preceding GST, they did extensive customer outreach, published price schedules, laid down acceptable levels of profiteering, the formula for net dollar margin rule etc. so that everyone knew what to expect. From a legal perspective, that is the correct way to go about things,” says Bhattacharjee.

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