Anti-Profiteering under GST: The Unruly Horse

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Section 171 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) provides for the Anti-profiteering measure which provides that any reduction in the tax rate on any supply of goods or services or the benefit of input tax credit (“ITC”) shall be passed on to the consumer by way of commensurate reduction in prices of that good or service, as the case may be.

The term Profiteering as per the Black’s law dictionary is defined as taking advantage of unusual or exceptional circumstances to make excessive profits, like selling of scarce goods at inflated prices during war. The purpose behind the introduction of the anti-profiteering measure under the GST regime is to provide the benefit of any reduction in tax rates to the consumers and prevent entities from making excessive profits.


In the year 2005, the Indian indirect taxation system underwent a drastic shift from the then existing general sales tax to Value Added Tax (“VAT”).  The VAT Act, 2005, and the rules made thereunder came into effect from April 1, 2005, in many Indian States. 

By the introduction of VAT, the Government aimed at passing the benefit of any reduction in the rate of tax to the consumers, as the VAT had lower rates, as compared to Sales Tax, and allowed offsets of tax on inputs against those on outputs thereby avoiding double taxation.

Since the VAT Act had no anti-profiteering related provision, most of the entities refrained from passing on the benefit of reduction in taxes to the consumers. The Comptroller & Auditor General of India (“CAG”) in its report titled ‘Implementation of Value Added Tax (VAT) in India-Lessons for transition to GST’ referred to several cases of profiteering by dealers by not passing on the benefit of tax rate reduction to the consumers in the wake of implementation of VAT in the country. The above report, after verifying the documents of 13 manufacturers in the initial months of VAT implementation, found that the dealers did not reduce the MRP despite a sharp fall in the tax rate post-VAT implementation.

Therefore, to avoid any such scenario, an anti-profiteering provision was first introduced under Section 163 of the revised draft Model GST law, released on November 2016. The GST Council in its 15th meeting held on 3rd June 2017 discussed the scope of the anti-profiteering provision and framed the Anti-Profiteering Rules, 2017.

Legal Provisions with regards to Anti-profiteering

Section 171 of the CGST Act deals with the anti-profiteering measure, to provide that any reduction in rate of tax on any supply of goods or services or the benefit of ITC shall be passed on to the recipient by way of commensurate reduction in prices. Section 171(2) empowers the Central Government to constitute an Authority to examine whether ITC availed or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services. This is to safeguard the interest of the consumer from any arbitrary price increase in the name of GST.

The Central Government by notification constituted the National Anti-profiteering Authority (“NAA”) as a Nodal agency to ensure the compliance of Section 171 of the CGST Act. The NAA shall consist of a chairman and four technical members. Apart from NAA, there will be a Standing Committee to examine the veracity of any complaint and if it is satisfied that there exists prima-facie evidence to show that the manufacturer or the supplier has not passed on the benefit of reduction in the tax rate on the supply of goods or services, or the benefit of ITC to the recipient by way of commensurate reduction in prices, it shall refer the matter to the Director-General of Anti-profiteering (“DG”) for a detailed investigation.

The DG will conduct the investigation and furnish the report of its findings before the NAA. After receiving the DG report, NAA shall determine whether there has been a violation or not.

NAA has the power to determine what constitutes profiteering and what will not constitute profiteering on a case to case basis. Based on the findings NAA may order a reduction in prices, return of the total profiteered amount with 18% interest, the imposition of penalty, and cancellation of registration under the Act.

Anti-profiteering provisions in other jurisdictions


Australia was the first country to come up with anti-profiteering provisions. Australia introduced GST on 1st July 2000 and the anti-profiteering monitoring remained instrumental for 3 years, starting from 8th July 1999 to 30th June 2002. The Australian Competition and Consumer Commission (“ACCC”) was the anti-profiteering watchdog. The ACCC framed guidelines on price exploitation “Price exploitation and new tax system” to provide entities with basic information to comply with the newly incorporated provisions.

Australia followed the Net dollar or Price Margin Rule for the determination of the price variance and changes, respectively. As per the rule, in case after the introduction of GST the incremental taxes and input cost fall by 1 dollar then prices should also fall by at least 1 dollar and the price margin rule prescribed that in any circumstance, the prices charged by the entities should not rise by more than 10% because of tax changes.


Malaysia also had an anti-profiteering mechanism in the form of “The Price Control and Anti-Profiteering Act, 2011” (“PCAP”) and the PCAP Regulations 2014 to control the prices of goods and services. Malaysia followed Net profit margin methodology (“NPMM”), which led to a lot of criticism and the closure of several businesses. Under NPMM profit made by any entity is recorded before any tax rate change and throughout the year the profit margin must not change. Since NPMM used to consider the absolute profit margin, so despite the rise in the cost of raw material or any other market conditions, manufacturers had to comply with the profit margin fixed in the beginning, otherwise they would be charged for anti-profiteering.

Due to which several businesses started incurring losses and the Malaysian government amended the PCAP regulations to consider the profit margin or mark up in percentage terms rather than in absolute terms. PCAP regulation provided the formula to determine the net profit margin after considering all the factors such as tax, suppliers cost, supply and demand related conditions, circumstances related to geographical and product market.

Issues with Anti-profiteering related provisions in India

After analysing Section 171 of the CGST Act and Chapter XV of the CGST Rules and the procedure established by NAA, the following issues arise with regard to anti-profiteering.

  1. There is no procedure to make the anti-profiteering computation; whether it is to be made at a product level or segment level or business vertical or company level. Due to any tax change, there might be profit in one product line and loss in other, so how will profiteering be computed. Further, the same product is marked differently to a different segment of people.
  2. Manufacturers set the prices in most of the cases, but the sale is made through independent wholesalers, distributors, retailers, etc.
  3. The law does not provide the duration within which the benefit arising out of any tax reduction is to be passed on to the consumer and it is difficult to implement the pricing change immediately, due to the large inventory in the pipeline.
  4. There are certain products, prices of which are determined as per various statutory provisions e.g., pricing of drugs and medicines is governed as per the D&C Act, 1940 and Drugs Prices Control Order 2013, so how will the anti-profiteering provision work in such cases.
  5. Section 171 provides that any reduction in tax rate or any ITC benefit is to be passed on to the consumer only by way of the commensurate reduction in price, which may sometimes lead to absurd pricing such as 20.64 Rupees, which is difficult to pay by cash.

Recommendations and Conclusion

The objective behind the introduction of the anti-profiteering provision was just and fair. Any reduction in taxes needs to be passed on to the consumers because the government is suffering loss in revenue, and to benefit the consumers by way of reduced prices, not to enrich the large corporate entities or manufacturers.

But Section 171 and rules made thereunder became an instrument to harass businesses. Rule 126 of the CGST Rules granted unrestricted power to the NAA to determine the methodology and procedure as to whether the reduction in tax rate or ITC benefit has been passed on by the registered person to the consumer or not.

Till date NAA has no specific formula or method to determine what constitutes profiteering, there is no procedure as to what the period of investigation should be. NAA decides profiteering on a case to case basis without any set procedure, which is arbitrary and against the principle of due process.

It is high time that India should learn a lesson from Malaysia where arbitrary anti-profiteering provisions lead to the closure of businesses. India should come up with a definite formula-based methodology for the profiteering as done in other countries, to avoid the ambiguity and litigation thereafter and provide grammage increase as an alternative to price reduction. It is a much-needed step to improve India’s ranking in the Ease of Doing Business Index.

Author: Mohit Sharma, Institute of Law, Nirma University.

Editor: Astha Garg, Junior Editor, LexLife India.

Author: Mohit Sharma,  Institute of Law, Nirma University.
Mohit Sharma.