Meaning of Profiteered

The expression "profiteered" has been defined in Explanation 1 to section 171 of the CGST Act, 2017 which deals with Anti-Profiteering measures shall mean ‘the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services or both.’

Constitutional validity of Anti-profiteering measures

Hon’ble Delhi High Court in the case of Reckitt Benckiser India (P.) Ltd. v. Union of India [2024] 158 taxmann.com 675/2024 (82) G.S.T.L. 344/102 GST 495/(2024) 14 Centax 374 (Delhi) and Others held that provisions of section 171 of CGST Act are not price fixing mechanism; neither do they violate either Article 19(1)(g) or 300A of Constitution of India. It was further held section 171 of CGST Act, 2017 as well as rules 122, 124, 126, 127, 129, 133 and 134 of CGST Rules, 2017 are constitutionally valid. SLP has been filed against the said case in Inox Leisure Ltd. vs. Union of India [2024] 164 taxmann.com 713 (SC)/[2024] 88 GSTL 257 (SC)/[2024] 105 GST 571 (SC)[26-07-2024].

 Authority to examine only the product complained or on all products

Section 171 of the Act, 2017 is widely worded and does not limit the scope of examination to only goods and services in respect of which a complaint is received. The scope of powers of the DGAP is provided for in Rule 129 of the Rules, 2017. From a reading of the said Rule especially the expression ‘any supply of goods or services ‘used in sub-rule (2) of Rule 129, it is apparent that the scope of the DGAP’s powers is very wide and is not limited to the goods or services in relation to which a Complaint is received. The word ‘any’ includes within its scope ‘some’ as well as ‘all’.

GSTAT in its judgment in the case of DGAP vs. Urban Essence (Subway Franchisee) [2025] 177 taxmann.com 376 (GSTAT - NEW DELHI)[05-08-2025] while dealing with the situation where franchisee was accused of profiteering by not passing on GST rate cut from 18% to 5% w.e.f. 15.11.2017 argued that complaint was only for one product and hence, DGAP was not justified in examining rate-cut benefit for all products; it has been held that since a single GST return and ITC register entry covered all supplies, DGAP had rightly examined rate-cut benefit for all products.

Collecting GST on profiteered amount is a right justification or whether the intent to pass on the benefit to the consumers would matter

It has been held in the case of Reckitt Benckiser India (P.) Ltd. v. Union of India [2024] 158 taxmann.com that both the Central as well as the State Government had no intent of collecting additional Goods and Services Tax on the higher price as they had sacrificed their revenue in favour of the buyer. By compelling the buyers to pay the additional Goods and Services Tax on a higher price, the supplier has not only defeated the intent of the Governments but has also acted against the interest of the consumer and therefore, the Goods and Services Tax collected by him on the additional realization has rightly been included in the profiteered amount.

It is settled law that it is the prerogative of the Legislature to decide the manner as to how the reduction in rate of tax or the benefit of Input Tax Credit is to be passed on to the consumer. In Dr. Ashwani Kumar v. Union of India (2020) 13 SCC 585, the Supreme court has held as under:-

"11. The legislature as an elected and representative body enacts laws to give effect to and fulfil democratic aspirations of the people. The procedures applied are designed to give careful thought and consideration to wide and divergent interests, voices and all shades of opinion from different social and political groups. Legislature functions as a deliberative and representative body. It is directly accountable and answerable to the electorate and citizens of this country. This representativeness and principle of accountability is what gives legitimacy to the legislations and laws made by Parliament or the State Legislatures. Article 245 of the Constitution empowers Parliament and the State Legislatures to enact laws for the whole or a part of the territory of India, and for the whole or a part of the State respectively, after due debate and discussion in Parliament/the State Assembly."

In the present instance, the legislative mandate is that reduction of the tax rate or the benefit of Input Tax Credit must not only be reflected in reduction of prices but it must also reach the recipient of the goods or services. So, the question that arises is whether reduction in price can be in the form of substituting the benefit in the form of reduction of actual price with any other form such as increase in volume or weight or by supply of additional or free material or festival discount or cross-subsidisation, or does it mean that the benefit of the rate reduction and Input Tax Credit reach the final consumer by way of ‘cash in hand’ through commensurate reduction in prices.

Authority to examine the anti-profiteering cases

Section 171(2) has constituted the appointed the ‘Authority’ from time-to-time since inception of GST to examine whether input tax credits 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 or both supplied by him. 

The authority appointed from time to time for anti-profiteering under the GST regime in India is the National Anti-Profiteering Authority (NAA). Since December 2022, the Competition Commission of India (CCI) has also been empowered as the new anti-profiteering authority to examine such matters. Further, from 1st October 2024, the GST Appellate Tribunal (GSTAT) handles anti-profiteering cases.

Application of anti-profiteering measures after the sunset date as 1-4-2025

Finance (No. 2) Act, 2024 has inserted a proviso to section 171(2) stating that the Government may by notification, on the recommendations of the Council, specify the date from which the said Authority shall not accept any request for examination as to whether input tax credits 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 or both supplied by him. Basis which CBIC issued Notification No. 19/2024 – Central Tax [F. No. CBIC -20016/25/2024-GST], dated 30-9-2024 appointing 1st April, 2025 as the sunset date. However, amidst Global headwinds, during the Independence Day, it was announced that there would be a major rate rationalisation that would take place before Diwali and following 56th GST Council Meeting held on 3rd September, 2025 recommended rate reduction on various goods and services effective from 22-9-2025. So, the question that naturally arises is that when the situation is same as that when GST was introduced that rates were reduced or were benefits of ITC was available, reduction in price was expected for which necessary measures were incorporated in section 171 but as the sunset date has been passed, can the Government extend the said date?

In this context, though there is absolute silence in the Press Release & FAQs issued consequent to the aforesaid meeting, however, during the course of Press Conference, one of the Officials presented the statistics around anti-profiteering that took place during GST implementation and have placed trust on the companies to pass on the benefits. The brief summary of statement made on Anti-Profiteering is:

• Since the inception of the anti-profiteering mechanism, about 704 cases have been registered.

• Around 60% of these cases were initiated within the first 3-4 years of implementation.

• The total alleged profiteering amount stood at around ₹4,362 crores.

• It is noted that most of the industry has largely passed on the benefits of rate cuts.

• Many industries have publicly committed to passing on the benefits of GST rate reductions to consumers.

• The government will continue to engage with the industry to ensure that the benefits are transmitted to end consumers.

• The expectation is that since the rate reductions benefit the businesses as well, the benefits will eventually be passed on to the consumers.

Therefore, it would be early to comment if that would work merely on trust basis or whether the sunset date would be further extended, as we may have to wait for some time to see further clarity on the same, as extension may require fresh legislative amendment or recommendation of GST Council along-with the issuance of notification. Currently, there is no such recommendations expressly written in the Press Release, so it appears that more of voluntary approach needs to be taken by the businesses. However, it seems that the engagement by the authorities and the expectations to pass on the benefit to the consumers, is the key to understand that to the extent possible Government will ensure that benefit reaches to the consumers.

GST Rate reductions as recommended in 56th GST Council Meeting

It has been recommended to rationalise the rates roughly around to 440 goods where around 60% of the goods have been moved from 12% GST to 5% GST, 9% from 12% GST to Nil rate and 7% from 28% GST to 18% GST while another 12% has been transferred from 18% GST to 5% GST. GST rate reductions may impact multiple sectors including food (dairy, breads, packaged foods), tobacco (only tendu leave & Indian Katha), agriculture (machinery, bio-pesticides), fertilizers, renewable energy (solar, wind, bio-gas), textiles (manmade fibers, yarns), health (medicines, medical devices, diagnostic kits), education (school supplies, vocational training), common man items (toiletries, bicycles, household goods), consumer electronics (ACs, TVs, dishwashers), paper, transportation (small cars, three-wheelers, auto parts), sports goods & toys, leather, wood products, defense equipment, footwear, construction materials (cement, bricks), handicrafts and various machinery components, as well as service sectors like hospitality, wellness, and insurance.

Few scenarios arising from the rate rationalisation in businesses

Now, there could be various scenarios with which the taxpayers may have to deal with, however, prima facie, there are few things which comes to the mind in the context of price reduction in cases where outright exemption has been given:

·       How about the manufacturers having accumulated ITC whose final products have been made exempt from the GST?

·       How about the service providers having accumulated ITC whose services have been made exempt from the GST?

·       What if both the above type of taxpayers are wholly engaged in exempt supplies and what if they are engaged in supply of taxable goods also?

·       How about the stockist, distributor, dealers, retailers registered in GST having accumulated ITC whose final products have been made exempt from the GST?

·       How about the stockist, distributor, dealers, retailers registered in GST having no ITC balance but having stocks in hand whose final products have been made exempt from the GST?

Further, there are scenarios where rates are reduced, where following are the concerns which may arise like especially in the light of denial of refund of accumulated ITC under inverted tax structure on account of rate reduction as stated in FAQ:

·       How about the manufacturers/service providers whose GST rates on the final products have been reduced creating more inversion in taxes?

·       How about the manufacturers/service providers whose GST rates on the final products have been reduced where corrections have been made in inversions like textile and fertilizer?

·       How about the stockist, distributor, dealers, retailers registered in GST having stock-in-hand of goods on which rates have been reduced?

Section 171(3A) demands penalty of 10% of the amount so profiteered, however, no penalty shall be leviable if the profiteered amount is deposited within 30 days of the date of passing of the order by the Authority.

Manner to ascertain the benefit of rate reduction or ITC that needs to be passed on to the consumers

There is no fixed/uniform method or mathematical formula that can be laid down for determining profiteering as the facts of each case and each industry may be different. The determination of the profiteered amount has to be computed by taking into account the relevant and peculiar facts of each case. There is ‘no one size that fits all ‘formula or method that can be prescribed.

The question that may come to the manufacturers is whether it is under a legal obligation to affix stickers for change of MRP on the goods lying in distribution chain? Or can it be said that such sticker can also be affixed by persons like distributors, dealers or retailers? Generally, at the time of import or manufacture, the importer or manufacturer is under obligation to comply with various laws. Legal Metrology Act, 2009, casts obligation and places a ban that the MRP cannot be altered. CGST Act and Rules made thereunder do not deal with affixation of MRP. Affixation of stickers with revised MRP and allied compliances are provided under Legal Metrology Act, 2009.

Rule 6(3) of Legal Metrology (Packaged Commodities) Rules 2011 states that it shall not be permissible to affix individual stickers on the package for altering or making declaration required under these rules. However, for reducing the Maximum Retail Price (MRP), a sticker with the revised lower MRP (inclusive of all taxes) may be affixed and the same shall not cover the MRP declaration made by the manufacturer or the packer, as the case may be, on the label of the package. As per the above provision, in respect of reduction in MRP, it is permissible to affix sticker with revised lower MRP and ensure the revised MRP does not cover the MRP declared earlier. The said rule provides discretion to the supplier regarding affixation of sticker as the words used are 'may be affixed'. Therefore, in case of reduction in MRP, there is no compulsion to affix sticker with revised MRP. In terms of Rule 33(1) of the aforesaid rules, the Central Government can relax any of the conditions in the rules. In exercise of the said powers, the Legal Metrology Division of Department of Consumer Affairs has issued a circular dated 4-7-2017 at the inception of GST regime permitting the manufacturers or packers or importers to change the MRP on unsold stock manufactured/packed/imported prior to 1st July, 2017 after inclusion of the increased amount of tax due to GST if any, in addition to the existing MRP for a period of three months w.e.f. from 1st July 2017 to 30th September 2017 and extended further to 31st March 2018. Rule 6(3) deals with affixation of sticker with revised lower MRP without reference to person who is empowered in this regard. The only condition is that such sticker should not cover the MRP declaration already made by the manufacturer or packer. Therefore, it can be said that such sticker can also be affixed by persons like distributors, dealers or retailers. The law recognizes that the product may be anywhere in the distribution channel and all such persons like dealers and retailers may affix sticker to show reduced MRP.

The question also arises is whether it is legally possible to pass on the benefits of the reduction of rate of tax in cases of low priced products in the FMCG industry? In this regard, Legal Metrology (Packaged Commodities) Rules, 2011 as amended by the Legal Metrology (Packaged Commodities) Amendment Rules, 2017 with effect from 1st January, 2018 which states in its section 2(m) that "retail sale price" means the maximum price at which the commodity in packaged form may be sold to the consumer inclusive of all taxes. For this purpose, rule 6 states that the retail sale price of the package shall clearly indicate that it is the maximum retail price inclusive of all taxes and the price in rupees and paise be rounded off to the nearest rupee or 50 paise. It may not be legally and commercially possible for the Respondents to reduce the MRP on such SKUs by only the proportionate amount. In such a scenario, the options available could be to compensate by a higher price reduction on other SKUs, or to pass higher price reduction/free grammage on selected SKUs and correspondingly lower price reduction on other SKUs. 

Should every tax rate reduction must result in "price reduction"

The question that arises now is whether every tax rate reduction must result in "price reduction"? Can the base price be raised based on commercial factors or any other factors necessitating the setting off of such reduction of price with proper justification? In this regard, reliance can be placed in the case of Reckitt Benckiser India (P.) Ltd. v. UOI [2024] 158 taxmann.com 675/102 GST 495/82 GSTL 344 (Delhi)/2024 SSC Online Del 588, wherein Hon’ble Delhi High Court has held that the use of expression "shall" in Section 171 of the Act, 2017 means that the supplier is required to pass on the benefit of the reduced tax rate and benefit of Input Tax Credit, and that such passing on is to be carried out only by way of commensurate reduction of price of the Goods or Services. Accordingly, costing and market related factors are irrelevant for NAA, as it is only required to examine whether or not there is any reduction in tax rate or benefit of accruing Input Tax Credits and if so whether the same has been passed on by the way of commensurate reduction of prices. The NAA is not concerned with the price determined by the supplier, for the supply of particular goods or services, exclusive of the GST or Input Tax Credit component. The Supplier is at liberty to set his base prices and vary them in accordance with the relevant commercial and economic factors or any applicable laws. Consequently, NAA is mandated only to ensure that the benefit of reduced rates of taxes and Input tax Credit is passed on. NAA cannot force the petitioners to sell their goods or services at reduced prices.

The Delhi High Court is further of the view that the manufacturer/supplier despite reduction on rate of tax or benefit of Input Tax Credits can raise the prices based on commercial factors, as long as the same is not a pretense. The Court took note of the concession made by the Counsel appearing for the Revenue that in some cases, commercial factors might necessitate an increase in price despite reduction in rate of tax or increase in availability of benefit of Input Tax Credit.

The Court was further in agreement with the Amicus Curiae that if there is any variation on account of other factors, such as any costs necessitating the setting off of such reduction of price, the same needs to be justified by the supplier. The inherent presumption that there must necessarily be a reduction in prices of the goods and services is a rebuttable presumption. It is clarified that if the supplier is to assert reasons for offsetting the reduction, it must establish the same on cogent basis and must not use it merely as a device to circumvent the statutory obligation of reducing the prices in a commensurate manner contemplated under Section 171 of the Act, 2017.

Time till which benefit needs to be passed on

In regard to the time till which the same needs to be adhered, CGST Act, 2017 does not fix a time period during which price-reduction has to be offered as same has to take effect so long as direct relation between reduction of tax rate or benefit of Input Tax Credits exists and there is no other factor effecting/countering same. 

Conclusion

The anti-profiteering provisions under Section 171 of the CGST Act, 2017, coupled with supporting rules and judicial interpretations, establish a clear mandate that businesses must pass on the benefits of GST rate reductions and input tax credit to the end consumers through commensurate price reductions. However, the law allows suppliers to manage base prices based on legitimate commercial factors, provided such adjustments are justified and not a pretense. While the current sunset clause on anti-profiteering authority examination remains a subject of ongoing discussion, the commitment from government and industry stakeholders to uphold consumer interest is pivotal if read in the light of The Consumer Protection Act, 2019, which plays a complementary role by empowering consumer protection authorities and forums to address unfair and restrictive trade practices, including failure to pass on the benefit of reduced rates to consumers. The Central Consumer Protection Authority (CCPA) under the Act has powers to investigate and act against restrictive trade practices, ensuring that consumers receive goods and services at competitive prices reflecting any legitimate tax benefits. Businesses must remain vigilant and should ideally prepare to meet these evolving regulatory expectations to foster trust and fairness in the GST framework and consumer market.

 Stay tuned! Thanks for reading.

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Disclaimer:

This article is intended for informational purposes only and does not constitute legal or professional advice. Readers are advised to consult qualified professionals or official authorities for specific guidance and compliance requirements relating to GST anti-profiteering provisions and Legal Metrology regulations.