The Delhi High Court has upheld the constitutional validity of the anti-profiteering clause in the GST law, which requires companies to pass on the benefit of lower taxes and input tax credit to consumers. The ruling will affect over 100 companies that had challenged the provision and the orders of the National Anti-Profiteering Authority (NAA).
What is anti-profiteering?
Anti-profiteering is a provision in the GST law that aims to protect the interests of consumers by ensuring that they get the full benefit of any reduction in tax rates or input tax credit. Section 171 of the CGST Act states that any registered person who supplies goods or services shall not charge more than the commensurate price, taking into account any change in tax rates or input tax credit.
What is the role of NAA?
The NAA is a statutory body that was set up in 2017 to enforce the anti-profiteering provision. The NAA has the power to order any supplier who has profiteered to reduce the prices, return the undue benefit to the consumers, impose penalty, and cancel the registration. The NAA can take suo motu action or act on complaints from consumers, tax authorities, or other stakeholders.
What were the arguments of the petitioners?
The petitioners, which included FMCG majors, electronics firms, builders, and restaurants, had challenged the constitutional validity of Section 171 and the rules framed under it. They had argued that:
- The provision was beyond the legislative competence of Parliament as it interfered with their right to carry on trade and business under Article 19(1)(g) of the Constitution.
- The provision was vague and arbitrary as it did not define what constituted ‘profiteering’ or ‘commensurate reduction in prices’.
- The provision conferred excessive and unguided powers on NAA, which violated their right to property under Article 300A of the Constitution.
- The provision violated the principles of natural justice as it did not provide for an appeal mechanism or a time limit for completing the investigation.
What was the response of the government?
The government had defended the provision as a consumer welfare measure that was necessary to prevent suppliers from appropriating the benefits of GST. The government had contended that:
- The provision was within the legislative competence of Parliament as it was incidental to its power to levy taxes under Article 246A of the Constitution.
- The provision was not vague or arbitrary as it was based on well-established principles of anti-profiteering in other countries and international best practices.
- The provision did not confer unbridled powers on NAA, which was bound by the rules and procedures laid down by law.
- The provision did not violate natural justice as it provided for an opportunity of hearing, a reasoned order, and a review mechanism.
What did the court decide?
The court upheld the constitutional validity of Section 171 and the rules framed under it. The court held that:
- The provision was within the legislative competence of Parliament as it was a reasonable restriction on trade and business in public interest under Article 19(6) of the Constitution.
- The provision was not vague or arbitrary as it provided sufficient guidance to determine ‘profiteering’ and ‘commensurate reduction in prices’ based on objective criteria such as cost analysis, market conditions, profit margins, etc.
- The provision did not confer excessive powers on NAA, which was subject to judicial review and accountability.
- The provision did not violate natural justice as it ensured due process of law and fair treatment to all parties.
The court also quoted some observations made by NAA in its orders, such as:
- “The Respondents have denied benefit of rate reduction to their customers in contravention of Section 171 (1) which amounts to profiteering.”
- “The Respondents have acted in conscious disregard of their obligation under Section 171 (1) which reflects their malafide intention.”
- “The Respondents have resorted to profiteering by charging more than what they could have charged by issuing incorrect tax invoices.”
- “The Respondents have not only indulged in profiteering but have also committed an offence under Section 122 (1) (i) of CGST Act.”
What are the implications of the ruling?
The ruling will have significant implications for several companies that had challenged the orders of NAA or were under investigation by it. The NAA had passed orders against various companies for profiteering from GST rate cuts or input tax credit on products such as sanitary napkins, shampoos, detergents, chocolates, coffee, etc. The NAA had also found cases of profiteering by builders and restaurants that did not pass on the benefit of lower GST rates or input tax credit to home buyers or customers. The ruling will also have a deterrent effect on other suppliers who may be tempted to increase their prices or margins after GST rate cuts or input tax credit.
The ruling will have significant implications for several companies that had challenged the orders of NAA or were under investigation by it. According to some web sources , some of the companies affected by this ruling are:
- Hindustan Unilever: Ordered to deposit Rs 380 crore for profiteering from GST rate cuts on products such as detergents, shampoos, skin care products, etc.
- Jubilant FoodWorks: Ordered to deposit Rs 41 crore for profiteering from GST rate cuts on pizzas sold by Domino’s.
- Pyramid Infrastructure: Ordered to deposit Rs 8.2 crore for profiteering from GST rate cuts on flats sold by the builder.
- Abbott Healthcare: Ordered to deposit Rs 96 lakh for profiteering from GST rate cuts on sanitary napkins sold by the company.
- Excel Rasayan: Ordered to deposit Rs 5 lakh for profiteering from GST rate cuts on cleaning products sold by the company.
The ruling will also have a deterrent effect on other suppliers who may be tempted to increase their prices or margins after GST rate cuts or input tax credit.