MC EXCLUSIVE Government may invoke Legal Metrology Act to check profiteering on GST rate cuts

Some businesses may be justifying price increases by citing higher input costs

The government is considering using the Legal Metrology Act, 2009, to crack down on businesses that may not be fully passing on the benefits of the Goods and Services Tax (GST) rate cuts to consumers. Government sources told Moneycontrol that instances have been noticed where companies appear to be adjusting the base price of goods in a way that reduces the impact of the GST reduction.

While the Central Board of Indirect Taxes and Customs (CBIC) can verify whether the correct GST rate is applied, the challenge arises when companies tweak the base price of goods. A government source explained, “It is not a GST enforcement issue but falls under the Legal Metrology Act. GST covers only the tax component, not the product value. As long as the correct GST rate is applied, businesses are compliant. The problem arises when companies raise the base price of goods. Since GST law cannot regulate pricing decisions, enforcement has to be through the Legal Metrology framework.”

The Legal Metrology Act regulates trade in weights and measures and sets rules for pre-packaged commodities. It empowers the government to act against companies tampering with base prices and issue penalty notices in cases where consumers are denied the benefit of tax reductions.

What’s the issue?

Officials pointed out that some businesses may be justifying price increases by citing higher input costs, muting the effect of the GST cuts. “The issue is of value. Suppose an item with 18 percent GST was priced at Rs 118. With GST reduced to 5 percent, it should cost Rs 105. But some companies claim input costs have risen and are implementing 5 percent GST on Rs 105 instead,” one source said.

Another source added, “Since the tax rate is lower, companies argue that their costs have gone up. They are increasing the base value and calling it a business decision. GST law cannot intervene in such pricing matters. The Legal Metrology Act, however, looks at whether the benefit is actually being passed on to consumers.”

A second government source confirmed that CBIC is gathering data. “CBIC will collect price information before and after the GST rate cuts and share it with the Department of Consumer Affairs. Action, including penalties, can then be taken under the Legal Metrology Act. This is mainly a transition issue — once new stocks reach the market, they will reflect the revised prices. Until then, the government wants to ensure that consumers actually benefit from the GST cuts,” the source said.

Past anti-profiteering framework

Until recently, profiteering complaints were adjudicated by the National Anti-Profiteering Authority (NAA), a statutory body set up under GST law in 2017. The NAA ensured businesses passed on tax rate reductions and input tax credit benefits to consumers. Its mandate ended in December 2022, and pending cases are being transferred to the GST Appellate Tribunal (GSTAT).

The move comes after the GST Council rationalised rates earlier this month. The Goods and Services Tax (GST) has been reformed into a simplified two-slab structure, with most goods and services taxed at 5 percent and 18 percent, replacing the earlier 12 percent and 28 percent slabs. A special 40 percent rate continues to apply to sin goods and ultra-luxury items like high-end cars.

CBIC monitors whether the correct GST rate is applied on invoices. However, if businesses increase the base price, the consumer may not see the full benefit of the rate cut. GST law does not allow CBIC to question pricing decisions -- enforcement has to be through the Legal Metrology Act.

What is the Legal Metrology Act, 2009?

The Act establishes and enforces standards of weights and measures, regulates trade and commerce in pre-packaged commodities, and ensures consumer protection. It is administered by the Department of Consumer Affairs under the Ministry of Consumer Affairs, Food and Public Distribution.

Why is CBIC not enforcing GST rate cut compliance directly?

CBIC can only monitor whether the correct GST rate is applied on invoices. However, if businesses increase the base value of goods, the consumer may not see the benefit of the rate cut. GST law does not allow CBIC to question base pricing decisions.

How will the government address profiteering?

CBIC will collect pre- and post-rate cut data on product prices and forward it to the Department of Consumer Affairs. Enforcement action, including penalties, can then be initiated under the Legal Metrology Act against businesses found tampering with MRPs or base pricing.

What happened to the National Anti-Profiteering Authority (NAA)?

The NAA was the body responsible for ensuring GST benefits were passed on to consumers. Its mandate expired in December 2022.