GST Anti-Profiteering Provisions: Delhi High Court Set To Hear Constitutional Challenge
As many as 50 companies across sectors, including real estate, consumer goods and quick service restaurants, have challenged the constitutional validity of the anti-profiteering provisions under the Goods and Services Tax.
The companies include Hindustan Unilever Ltd., Jubilant Foodworks Ltd., Johnson & Johnson Pvt. Ltd., Nestle India Ltd., and Reckitt Benckiser India Pvt. Ltd. While each will argue on specific facts of their case, the high court will first hear their arguments against the constitutional validity of Section 171 of the Central GST law.
The anti-profiteering provision says that suppliers of goods and services must pass on the benefit of any reduction in rate of tax or the benefit of input tax credit. The benefit must result in commensurate reduction in prices and the National Anti-profiteering Authority, or NAA, is empowered to ensure this. As per Rule 126 of the CGST, the NAA may determine the methodology and procedure for determining whether this benefit has been passed on.
The 50 companies are set to argue that both these provisions are bad in law on broadly four grounds, three lawyers involved in the matter told BloombergQuint.
Violation of Article 19(1)(g) of the Constitution, which allows any person to practise any profession, or to carry on any occupation, trade or business.
The manner in which the anti-profiteering provisions are being applied is restricting the right of companies to undertake business in the country, which is a market economy. The computation to determine profiteering is based solely on the change in tax rate, ignoring all other commercial realities and input costs, the companies have said in their submissions.
In its orders, the NAA has refused to take into account issues like increase in cost of raw material and utilities, currency fluctuations, etc., while determining profiteering, Rohan Shah, Supreme Court counsel and lawyer for some of the petitioners, pointed out. This means price has to remain static or be reduced if an industry has either got a GST rate cut or better credit mechanism, he said.
Apparently, this is something you have to do for an undefined period. Businesses are expected to keep their prices deflated forever. This becomes a mechanism of price control which is unconstitutional and bad in law.Rohan Shah, Counsel, Supreme Court
In several of its orders. NAA has assumed that tax and credit are the only two factors influencing prices, Shah pointed out. Let’s say in November 2017, there’s a GST rate cut for a particular product but in December, the foreign exchange rate went up—the expectation is there shouldn’t be an increase in price, he said.
Infringement of Article 14, which promises equal protection from law.
The arguments here is that section 171 and Rule 126 give unfettered discretion to the NAA to determine profiteering. Leaving it up to the NAA to determine methodology to compute profiteering, the companies have submitted, amounts to excessive delegation.
Further, the NAA also has the power to impose penalty and cancel registration as per the CGST Rules. The consequences of the breach and such powers should have been mentioned in the CGST Act itself and such wide and uncontrolled powers cannot be conferred under the CGST Rules, Charanya Lakshmikumaran, partner at Lakshmikumaran & Sridharan, said.
In a case involving Central Excise Rules, the Supreme Court has held that if there’s no substantive provision in the statute for the levy of interest or penalty, such a demand cannot be levied based on the application of rules.Charanya Lakshmikumaran, Partner, Lakshmikumaran & Sridharan
Arbitrariness In NAA’s Orders
The companies have submitted that lack of specified methodology to determine profiteering has led to discrimination and arbitrariness. Rule 126 requires the NAA to first determine the methodology and then assess whether there’s a case of profiteering, they have stated.
On methodology, the problem is twofold, Abhishek Rastogi, partner at Khaitan & Co. and lawyer for several petitioners, pointed out.
First, whether the methodology used in terms of the formula by NAA is the right mechanism to determine the quantum of profiteering. For instance, he said, whether the ratio of input tax credit to taxable turnover for the real estate sector is the right ratio to determine the quantum of profiteering.
Second, Rastogi said, how and why this ratio has been used and if this is the correct ratio then who has prescribed it? Companies have also submitted that different ratios or formula has been used for different sectors.
This leaves the taxpayers with uncertainty and this whole chaos is due to non-prescription of common methodology for sectors. Finally, the same ratio is giving different results for the same sector.Abhishek Rastogi, Partner, Khaitan & Co.
Composition of NAA
The final constitutional challenge has to do with the absence of any judicial member as part of NAA.
As per the CGST Rules, the chairman of the NAA must be an officer of the rank of secretary to the central government and the technical members must be of commissioner rank. The rules do not contemplate appointment of any judicial member as a part of the authority.
The NAA is labelled as an authority but it is exercising quasi-judicial powers, the companies have said. This makes it a tribunal and lack of a judicial member on it is contrary to the Supreme Court’s ruling in Madras Bar Association case. In this case, the apex court had held that tribunals should always have a judicial member.
"The constitution of the NAA itself being bad, any order or proceedings before it are bad in law," Shah said.
The case will come up for hearing before the high court on Dec. 7.