GST – Anti-Profiteering Law & Its Impact on Business

1. What is the Anti-Profiteering Law under GST?

The anti-profiteering mechanism under the Goods and Services Tax (GST) was introduced to ensure that businesses pass on the benefits of:

• Reduction in GST rates, and

• Input Tax Credit (ITC) availability

to consumers through commensurate price reductions.

In simple terms: ➡ If your tax cost goes down under GST, your selling price should also go down.

2. Legal Framework

The anti-profiteering provisions are contained in:

• Section 171 of the CGST Act

• Anti-Profiteering Rules, 2017

• Directorate General of Anti-Profiteering (DGAP) – Investigative Arm

• National Anti-Profiteering Authority (NAA) – Adjudicating Authority (Now this function has been transferred to the Competition Commission of India – CCI)

  
  

3. What Constitutes "Profiteering"?

A business is considered to be “profiteering” if it:

• Does not reduce price after a GST rate cut

• Fails to pass ITC benefits to customers

• Increases price disproportionately to hide benefits

• Uses artificial reasons to justify not decreasing prices

  
  

4. How Investigations Happened?

A typical investigation includes:

1. Complaint filed by any customer/business

2. DGAP investigates price, cost, and ITC changes

3. Report sent to NAA/CCI

4. Orders could include:

   1. Refund to customers

   2. Penalties

   3. Price reduction

   4. Interest @ 18%

   5. Depositing amounts in the Consumer Welfare Fund (if the customer is unidentifiable)

   
   

Impact on Businesses

1. Positive Impacts

1. Consumer Protection

   Ensures customers get the benefit of tax reductions — improves fairness in the market.

   
   

2. Promotes Transparency

   Forces businesses to maintain detailed price, cost, and tax-credit records.

   
   

3. Helps Prevent Unfair Competition

   Stops companies from gaining an undue advantage by not reducing prices when the tax structure becomes cheaper.

2. Negative Impacts / Challenges for Businesses

   1. Compliance Burden

Businesses must maintain:

• Pre-GST and post-GST pricing data

• ITC ledgers

• Cost sheets

• Invoices at every transaction level

This becomes especially complex in industries with thousands of SKUs (FMCG, pharma, retail).

b. Price-Setting Complexity

Every time the government changes the GST rate, companies must:

• Recalculate prices

• Inform distributors

• Adjust MRP labels

• Update ERP systems

This increases operational workload.

c. Risk of Investigations

Even minor price fluctuations can trigger customer complaints. Several large companies (FMCG, construction, hospitality) faced multi-crore anti-profiteering orders.

d. Unclear Methodology

No fixed formula from the government on how to calculate “commensurate reduction,” leading to disputes between businesses and authorities.

e. Impact on Working Capital

If the ITC benefit needs to be passed, companies might have to reduce prices immediately, even if inventory with old pricing is still unsold.

Practical Implications for Businesses

1. Price Monitoring Systems

   Companies need automated tools to track the impact of GST changes on pricing and margins.

   
   

2. Documentation Discipline

   Meticulous record-keeping is essential to defend against complaints.

   
   

3. Training of Sales & Finance Teams

   Teams must understand:

   • When a price must be changed

   • How to compute ITC benefits

   • How to handle customer complaints

     
     

4. Legal Risk Management

   Businesses often require internal audits and expert reviews to avoid violations.

   
   

Case Laws:

1. Director General of Anti-Profiteering (DGAP) v. Nestle India Limited:

   The National Anti-Profiteering Authority (NAA) found that Nestle had increased the base prices of products (like Maggi noodles and chocolates) to offset the GST rate reduction, thereby not passing the benefit to the consumer.

   
   

   Solution/Principle:

   The NAA determined the exact profiteered amount (around Rs. 90 crores) and ordered it to be deposited into the Consumer Welfare Fund (CWF), as individual consumers were unidentifiable. The methodology stressed that benefits must be passed on a "product-wise" basis, not averaged across a basket of products.

   
   

2. DGAP v. Johnson & Johnson Private Limited (and related distributor cases):

   In cases involving J&J products, it was found that the base prices were increased while maintaining the previous Maximum Retail Price (MRP), effectively retaining the tax benefit.

   
   

   Solution/Principle:

   The authorities ruled that responsibility for passing on benefits lies with the supplier, whether manufacturer, distributor, or retailer. Excuses such as billing software issues or agreements with the main company were not accepted as valid defenses. The profiteered amount, with 18% interest, was ordered to be deposited into the CWF.

Conclusion:

The GST Anti-Profiteering Law was designed for consumer welfare, but it has created significant compliance and operational challenges for businesses. While it promotes transparency and fairness, many companies feel the mechanism is subjective and increases uncertainty in pricing decisions.

Despite criticisms, the law has pushed businesses to become more accountable and systematic in passing on tax benefits to consumers.