GST Rate Cut Price Must Be Reduced

Source: Delhi High Court 

Why in News? 

Recently, Justices Prathiba M. Singh and Shail Jain ruled that when GST rates on products are reduced, the benefit must reach consumers through a corresponding price reduction and not by merely increasing product quantity while keeping the same MRP. The Court held that such practices amount to deception and defeat the legislative intent behind GST rate cuts, reaffirming the National Anti-Profiteering Authority’s stance. 

• The Delhi High Court held this in the matter of M/s Sharma Trading Company v. Union of India (2025). 

What was the Background of M/s Sharma Trading Company v. Union of India (2025) Case ? 

• Sharma Trading Company, a partnership firm, operated as a distributor and stockist of Hindustan Unilever Limited (HUL) products, including Vaseline VTM 400 ML. When the GST regime commenced on 1st July 2017, the applicable GST rate on the subject product was 28%, which was subsequently reduced to 18% through Notification No. 41/2017-Central Tax (Rate) dated 14th November 2017. 
• A complaint was filed against the Petitioner alleging that despite the GST rate reduction, the company continued to charge the same amount without passing on the benefit to consumers.  
• The National Anti-Profiteering Authority (NAPA) examined the complaint, and the Director General of Anti-Profiteering furnished an Investigation Report dated 16th March 2018 under Rule 129(6) of the CGST Rules, 2017. 
• Through its order dated 7th September 2018, NAPA found that the Maximum Retail Price remained Rs. 213/- both before and after the GST reduction, whilst the base price was increased from Rs. 158.66 to Rs. 172.77 per unit. NAPA determined that the Petitioner had profiteered Rs. 5,50,186/- by not passing on the 10% GST rate reduction benefit to consumers and directed deposit of this amount to the consumer welfare fund along with 18% interest. 
• The Petitioner challenged Section 171 of the CGST Act, 2017 and Rule 126 of the CGST Rules, 2017 as unconstitutional and ultra vires of Articles 14 and 19 of the Constitution. The Petitioner defended its actions by arguing that the product quantity was increased by 100 ml after the GST rate change, justifying the maintained price, and cited promotional schemes where the product was bundled with a Dove soap bar as a free product. 

What were the Court’s Observations? 

•  The Court noted that constitutional validity of Section 171 and relevant Rules had already been upheld in Reckitt Benckiser India Pvt. Ltd. v. Union of India, emphasising that the legislative mandate requires GST rate reduction benefits to reach consumers through actual price reduction, not through increased volume, weight, or bundled free material. 
• The Court stressed that anti-profiteering measures provide an institutional mechanism to ensure full benefits of input tax credits and reduced GST rates flow to consumers, safeguarding their interests. 
• The Court categorically rejected the argument that increasing product quantity by 100 ml justified maintaining the same price, holding this constituted deception and curtailed consumer choice.  
• The Court observed that the purpose of GST reduction is to make products more cost-effective for consumers, which would be defeated if prices remain unchanged whilst unknown quantities are increased without consumer request. 
• The Court cited Reckitt Benckiser precedent that benefits must reach consumers as "cash in hand" through commensurate price reduction, not through substitute forms like volume increase, festival discounts, or cross-subsidisation. 
•  The Court acknowledged potential transitional problems but held that manufacturers and retailers must be prepared for such issues and cannot defeat the purpose of GST rate reduction. 
• The Court clarified that "MRP" means "Maximum Retail Price," thus upon immediate GST rate reduction, even if product MRP remains the same, the GST component must be reduced, meaning products can be sold below MRP to pass on benefits. The Court held that all pre-existing promotional schemes ought to have been recalibrated with GST rate reductions. 
• The Court upheld NAPA's impugned order and directed transfer of Rs. 5,55,126/- (already deposited by the Petitioner as FDR) to the Consumer Welfare Fund at Central Bank of India. However, regarding penalty proceedings, the Court held these would not be applicable, noting that in Reckitt Benckiser, show cause notices for penalty proceedings related to Section 171(1) violations prior to Section 171(3A) coming into force had been withdrawn by NAA, rendering this issue infructuous. 

What is Section 171(1) of the CGST Act, 2017? 

• Mandatory Benefit Pass-Through: Section 171(1) mandates that any reduction in GST rate on goods or services, or any benefit from input tax credit, must be passed on to the recipient (consumer) through commensurate reduction in prices. This is a statutory obligation on all suppliers to ensure tax benefits reach the end consumer rather than being retained as additional profit. 
• Constitution of Authority: Section 171(2) empowers the Central Government, based on GST Council recommendations, to constitute an Authority or empower an existing authority to examine whether suppliers have actually reduced prices commensurately when they received input tax credit benefits or when tax rates were reduced. The proviso allows the Government to specify a cut-off date after which no new examination requests will be accepted. For this purpose, "Authority" includes the Appellate Tribunal, and "request for examination" means written applications filed by complainants. 
• Powers and Penalty Provisions: Section 171(3) provides that the Authority shall exercise powers and discharge functions as prescribed in the rules. Section 171(3A) establishes penalty provisions: if the Authority concludes after examination that a registered person has profiteered (failed to pass on benefits), that person becomes liable to pay penalty equivalent to 10% of the profiteered amount. However, no penalty is levied if the profiteered amount is deposited within thirty days of the order. "Profiteered" means the amount determined on account of not passing reduction benefits to recipients through commensurate price reduction. 

Case Law 

• Reckitt Benckiser India Pvt. Ltd. v. Union of India (2024): 
  • The Delhi High Court (29th January 2024) upheld Section 171 of the CGST Act, 2017 as constitutionally valid, declaring it a complete code clearly defining anti-profiteering powers. The Court ruled that GST reduction benefits must reach consumers through actual price cuts—not through increased volume, free items, discounts, or cross-subsidisation. It validated wide investigative powers beyond specific complaints and clarified that penalty proceedings for pre-Section 171(3A) violations were withdrawn, though individual orders remain challengeable on merits.