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It was widely perceived that the anti-profiteering mechanism set up under the GST regime was an initial nudge aimed to ensure that companies passed on the 'benefit' - be it a fall in tax rates, or an enhanced input tax credit - arising from the GST roll-out to the end consumer by way of commensurate reduction in prices. The adjudicating authority, National Anti-Profiteering Authority (NAA) set up in 2017, had a two-year tenure. But this was extended twice, till November 2022, with the mantle passed on to CCI subsequently.

It was widely perceived that the anti-profiteering mechanism set up under the GST regime was an initial nudge aimed to ensure that companies passed on the 'benefit' - be it a fall in tax rates, or an enhanced input tax credit - arising from the GST roll-out to the end consumer by way of commensurate reduction in prices. The adjudicating authority, National Anti-Profiteering Authority (NAA) set up in 2017, had a two-year tenure. But this was extended twice, till November 2022, with the mantle passed on to CCI subsequently.

This extension contrasts with international precedents, such as Australia's approach, where similar provisions were enforced, following the introduction of GST, although with a sunset clause.

In late January, the Delhi High Court, responding to many writ petitions filed by India Inc across sectors from FMCG to real estate, upheld the constitutional validity of the anti-profiteering provisions. It noted that the objective of Section 171 of the Central GST Act, which mandates the passing of GST benefits, is grounded in consumer welfare and equity principles.

That said, the court also clarified that there may be instances where the anti-profiteering mechanism is arbitrarily applied, either by enlarging the scope of proceedings beyond the jurisdiction or by failing to consider legitimate factors, such as cost escalations, which offset the reduction, or skewed input credit situations. In such cases, the remedy lies in setting aside orders on merits.

The immediate consequence is that India Inc., contending with complexities of a multiple tax-slab structure, with competing and complicated classification and a plethora of litigation on GST rates, now faces a Damocles' sword over its head.

An interpretation of the court's decision highlights three key challenges:

1. Open-time period: The court ruled that it is neither proper nor feasible to fix any specific period for the application of reduced price. This results in an indefinite period during which businesses could be scrutinized under Section 171. Consider the practical challenges if a business entity is required to produce detailed records of input and output costs dating back several years for a product to determine whether there was profiteering or not.

2. Broad scope of scrutiny: The Authority of NAA to 'direct investigations' into products beyond the initial complaint was expanded in 2019 to illustrate if the anti-profiteering complaint related to a sandwich sold by a fast-food chain that NAA could direct investigation into its other products. This led to concerns that the directorate-general of anti-profiteering (DGAP), 'on its own accord', was expanding the scope of the investigation.

With no right to appeal, businesses' only recourse against perceived arbitrary actions by DGAP was through litigation. Thus, even though only properly documented complaints can be filed for an alleged profiteering matter, the scope is broad enough in terms of a complainant as well as authorities to keep businesses on tenterhooks.

3. Lack of prescribed methodology: The court also held that no fixed or uniform method can be established for determining profiteering as the circumstances of each case and industry vary. It stated that NAA (now CCI) 'may determine' the methodology rather than 'prescribe' it. That being said, for the real estate sector, the court observed that the methodology adopted by NAA was flawed. As a result, the amount to be deposited would be contested in most cases, at least by companies in this sector.

In addition to the challenges of determining profiteering, companies may also be liable for reimbursing excess profits, interest charges from the date of sale, and potential monetary penalties. These financial repercussions could be compounded by the disallowance of such payments as business deductions for income tax purposes, effectively resulting in a double whammy.

While the court's decision is always open to appeal in the Supreme Court, finmin and GST Council must deliberate on the necessity of anti-profiteering laws. Many would argue that after almost seven years of GST implementation, prices should be determined by market forces, not by statute. With possible GST rate rationalization in the next 12-18 months, India Inc. would be worried about these provisions even more.