Repeal consumer protection disguised as tax provision

The Goods and Services Act, 2017 (act), came into force accompanied by concerns whether businesses would pass on its tax benefits to consumers. Keeping its promises, the government introduced anti-profiteering measures against unfair profiteering. They were implemented as temporary measures to pass benefits to end consumers by reductions in prices. Policymakers also set up the National Anti-Profiteering Authority (NAA), seemingly the new watchdog, to act as the regulator, ensuring end consumers reaped the benefits of reduced GST rates. The main concern of the business community has been that the anti-profiteering provisions do not explain how the extent of profiteering on the part of a registered supplier is determined.

Glaring omissions were no mechanism for calculating profiteering and no definition of the phrase “commensurate reduction” to bring about the intended results. Business entities were in difficulties because of a lack of explicit methodology for price resetting. In some instances, the NAA calculated the amount profiteered using base price methodology. This has been criticised for failing to recognise extraneous factors such as demand and supply, product range and fixed and variable costs, all of which are influential in determining price. In the absence of guidance, businesses passed on benefits in such forms as coupons, gift vouchers and reward points. The NAA subsequently clarified that product benefits were not tangible and could not be set off against other products. Benefits should be only in the form of reduced prices.

Such arbitrariness has led to many cases being brought in Delhi High Court, alleging constitutional invalidity. This is because the executive has unguided and unrestricted discretion. Courts have held that the uncontrolled discretion of the executive is contrary to the constitutional requirement of equality. However, on 29 January 2024 the court in Reckitt Benckiser India Private Limited and Ors v Union of India upheld the constitutionality of section 171 of the act and its associated rules.

The main grounds for a challenge are simple; there is a lack of adequate guiding rules and uniformity. Worldwide, governments have always tried to address profiteering or unfair pricing through general market regulation or amendments to consumer protection laws. India’s anti-profiteering measures are not unique. Australia recently pioneered them, followed by Malaysia, where they were made part of consumer protection law. It was intended to curb price exploitation by an embargo of high prices. Unlike India, Australia did not extend its three-year transitional period but passed a consumer welfare statute. Supposedly being a “temporary measure sparingly used”, the NAA’s permanent status needs to be reviewed to shield businesses from the consequences of non-compliance. User-friendly guidance is vital to follow international best practice.

The need for such a review is further demonstrated by a multitude of conflicting judgments. A uniform methodology for calculating the amount profiteered is essential instead of simply shifting the onus onto businesses. A reasonable band of margin variation should be adopted, acting as a bracket cap before penal consequences are triggered. It is not sufficient to put the onus onto FMCG firms and big companies to ensure a lowered MRP is passed on by retailers. The legislature should focus on defining such a reasonable band of margin variation as well as a threshold limit. This would be the bracket cap for registered retailers before they face penal measures. The objective should not be to leave discretionary power in the hands of an executive authority, which may lead to the harassment of taxpayers.

Prices of consumer goods fluctuate frequently, with many factors leading to price determination. Many matters determine product prices, making it nearly impossible to pass on a benefit derived from a tax reduction of less than 1% to the end consumer. Economists often say that prices rising at a slow and steady rate have always been an indication of a growing economy. However, in this case, the government has created the idea that anti-profiteering measures fall squarely within the category of welfare schemes. While the aim is to protect the common man, the legislature should ensure that the honest taxpayer is not the victim.

Mukesh Butani is the founder and managing partner, Shankey Agrawal is a partner, and Lopamudra Mahapatra is an associate at BMR Legal