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Section 171

1. Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.

2. The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, 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.

3. The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.

Analysis: This is called Anti-Profiteering measure

  • If there is reduction in rate of tax on the supply of goods or services or 
  • Benefit of input tax credit is now available under GST

Then a registered person must pass on the benefit by reduction in prices

For example, eating out has become cheaper under GST (mostly 18% GST as compared to earlier 20.5%). This benefit must be passed on to the consumers.

Passing of benefit due to reduction of tax rate, in case of supplies exclusive of tax or for immediate services is not a big challenge. This is because the reduction in tax rate will directly be evidenced by invoices, and the recipient will get benefit of the rate reduction. Such can be seen now in the cases of eating out and travelling through app-based taxis .

However, in case where contract of supplies is inclusive of taxes, this provision will cast responsibility on the supplier to reduce the price due to reduction in rate of taxes.

For example, FMCG items are normally sold on MRP basis or some other fixed prices by retailers. If there is any reduction in rate of tax it has to be passed on to the ultimate recipient. Accordingly, there will be a need to revise MRP or other prices fixed for such supplies.

However, if GST has a negative impact on the cost, then prices can be increased. For example: If the output supply was zero-rated in previous regime and also remains zero-rated in GST regime, the business will not get any input tax credit.

If the tax rates are increased, tax under reverse charge imposed etc. then prices will increase.

For example, domestic LPG was exempt from tax under earlier regime. Now they fall under 5% GST. This will result in an increase in the prices of cooking gas.

Almost all industries will be affected with respect to passing of benefit due to better credit chain. In most places, be it service sector, manufacturing, trading, or any specific industry, all are going to get advantage of better flow of input tax credit except sectors having zero-rated output supply. So overall the expectations of anti-profiteering provisions are commensurate reduction in prices of supplies.

For example, radio taxis earlier could not adjust the input VAT on office supplies with the output service tax payable. Now, ITC on all inputs can be adjusted against output tax. These benefits are passed on by them in the form of offers and discounts. Similarly, many big stores have GST sales and special offers to pass on the benefit.


Published by

CA Pradeep Sharma
Category GST   Report

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