Reasons Why Anti-profiteering provisions under GST laws are unconstitutional

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Reasons Why Anti-profiteering provisions under
GST laws are unconstitutional
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• 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.

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• 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.

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• 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 Councils
  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.

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• 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.

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• REASONS WHY ANTI-PROFITEERING PROVISIONS UNDER
  THE GST LAW ARE UNCONSTITUTIONALReason 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
  971 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.

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• 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 342 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.

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• 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.

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• 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
  prescribed3.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.

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• 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 Honble Supreme Court in Federation of Hotel
  Restaurant Assn. of India Vs. Union of India4
  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.

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• 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 Honble Supreme Court in
  Harakchand Ratanchand Banthia Vs. Union of
  India5 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.

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• Further, Section 171 of the CGST Act uses the
  term commensurate reduction in prices, but the
  term commensurate is not defined in the
  statute therefore, wide and unfettered power is
  conferred on NAA to interpret the term
  commensurate reduction in its subjective
  interpretation. For instance, in some cases, NAA
  has insisted that a commensurate reduction in
  prices must be an arithmetically precise amount,
  to the last paisa, whereas in other cases NAA has
  applied the de-minimis principle and taken an
  approach that the commensurate reduction in
  prices can be within a range and may not be
  arithmetically precise.
• Section 171 of the CGST Act is also based on a
  fundamentally flawed premise that commensurate
  reduction in prices must be passed on      only
  in monetary terms, which is not workable for the
  spectrum of goods/services available. For
  instance, a small SKUs of say shampoo sachet is
  sold at Rs. 1 or Rs. 2, and consequent to
  reduction in rate of tax, the manufacturer cannot
  be expected to reduce the price to Rs. 0.84 or
  Rs. 1.79, especially in the context of the fact
  that the minimum legal tender available is Rs. 1.
  Therefore, the commensurate reduction must be in
  varied forms including, an increase in grammage
  or additional/ complementary products, etc.Read
  more at https//taxguru.in/goods-and-service-tax/
  13-reasons-anti-profiteering-provisions-gst-laws-u
  nconstitutional.htmlCopyright Taxguru.in

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• Last, the anti-profiteering provisions under the
  GST law, mandate manufacturers/marketers to
  commensurately reduce price consequent to tax
  rate reduction but do not specify the period up
  to which such reduction is required to be
  maintained. The absence of the period up to which
  such reduction is required to be passed on makes
  the anti-profiteering provisions manifestly
  arbitrary, vague, imposes unreasonable
  restrictions and violates the fundamental right
  to carry on business and trade.
• Reason 5 Section 171 of the GST Act suffers from
  the vice of excessive delegation Section 171 of
  the GST Act suffers from the vice of excessive
  delegation in as much as it provides no guidance
  at all as to how the anti-profiteering provision
  is required to be implemented, how the amount of
  alleged profiteering is to be computed, who is
  the person required to comply with the provision,
  what is the period for which such provisions
  require compliance and the methodology that is
  required to be followed in making compliance.
  Section 171 does not lay down any policy,
  guideline, principles, or standards regarding the
  powers to be exercised by NAA, much less the
  manner in which such powers are to be
  exercised.Tags Anti-Profiteering, goods and
  services tax, GST, NAARead more
  at https//taxguru.in/goods-and-service-tax/13-re
  asons-anti-profiteering-provisions-gst-laws-uncons
  titutional.htmlCopyright Taxguru.in

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