Anti-Profiteering Mechanism on GST

• Goods and Services Tax (GST)
• ||
• December 8, 2020

Section 171 of the CGST Act, 2017 and rules 123 to 137 of the CGST rules deals with the provision of anti-profiteering authority under GST law which provides that it is mandatory to pass on the benefit due to the reduction in the rate of tax or from an input tax credit to the consumer by way of commensurate reduction in prices.

Profiteering is an activity of making unreasonable profits on the sale of essential goods, especially during times of emergency. It happens when you increase your product prices unfairly to create a higher profit margin. Companies may do this when there is a high demand for their products, or when supplies are scarce. The GST regime automatically creates chances for profiteering. For example- if your tax rate was 18% before GST, but after GST it was 5%. If you kept your prices the same, your profit margin would rise. Therefore, the purpose of GST is to create lower prices for consumers; the government considers this as profiteering.

Anti-profiteering is a mechanism to curb profiteering. It has been integrated under GST law to provide the interest of reduction in GST rates to the consumers in terms of reduced prices and not allow more profit margins to the business person. The suppliers of goods and services must pass on any reduction in the rate of tax or the benefit of input tax credit to consumers by way of proportionate decline in prices. This is not the first time that India has an encounter with anti-profiteering. West Bengal passed Anti-profiteering way back in 1958.

Procedure under anti-profiteering

1. State-level screening committee

• Screens the applications to be sure the supplier has not passed the benefit
• Relevant cases passed to the standing committee

2. Standing committee on anti-profiteering

• Receive written application
• Examine evidence that benefit has not passed on
• Within 2 months refer the case to Director-General

3. Director general of safeguards

• Investigate
• Collect evidence
• Issues notice within 3 months

4. National anti-profiteering authority

• This mechanism ensures that prices remain under check and also ensures that businesses do not pocket all the gains from GST
• Authority has the power for:
• • Reduction in prices
  • Return to the buyer, the benefit amount not passed along with 18% interest
  • Payment of penalty
  • Cancellation of registration

Anti-profiteering rules under GST
Section 171(1) emits responsibility to pass on the benefit of GST to the recipient for the following two aspects: 

1. Reduction of the tax rate in the new tax regime

• Passing of benefit due to reduction of the tax rate, in case of supplies preferential of tax or for instant services is not a big challenge. It is because invoices will directly evidence the reduction in the tax rate, and the beneficiary will get the benefit of the rate reduction. Such cases can be seen now for eating out and travelling through app-based taxis which has reduced by 1%
• Although, in the case where the contract of supplies is comprehensive of taxes, the provision will emit responsibility on the supplier to reduce the price due to the reduction in the rate of taxes. If GST has a negative effect on the cost, then prices can be increased. If tax rates are increased, tax under reverse charge imposed etc. then prices will rise.
• Example- domestic LPG was exempt from tax under earlier regime. Now they fall under the previous rule. Now they fall under 5% GST. This will increase the prices of cooking gas.

2. The benefit of input tax credit

• Almost all industries will be affected concerning the passing of benefit due to better credit chain. In every place, whether it is a service, manufacturing, trading or any other specific industry, all are going to get the advantage of the better flow of input tax credit except sectors having zero-rated output supply. So overall, the expectations of anti-profiteering provisions commensurate reduction in prices of supplies.
• Example- radio taxis previously could not modify the input VAT on office supplies with the output service tax payable. Now, ITC on all inputs can be limited against output tax. They pass on these benefits in the form of offers and discounts. Correspondingly, many big stores have GST sales and special offers to pass on the benefit.

Drawbacks for breaking this rule
If your company gets a notice from Director-General of safeguards, you have a chance to protect yourself. If the national authority decides that your functioning is above board, you can get away with a caution. If not, it’s up to the group to determine what happens. At a minimum, you will probably be ordered to reduce your prices appropriately in the future. In utmost cases, the authority could decide to revoke your GST registration. That means your company could not do any business that’s taxable under GST.

As a business owner in India, it’s essential to be conscious of the GST anti-profiteering laws. By keeping complete records and making sure you pass tax deductions and credits on to your customers, you can avoid penalties and future GST cancellation.

At AJSH, we assist our clients in dealing with various GST matters (GST registration, filing of GST returns, claiming refund & GST audits) by providing them adequate support and guidance from our end. If you have any questions or would like to know more about Anti-profiteering laws on GST, kindly contact us.