As per Section 171 of the CGST/SGST Act, any reduction in tax rate on any supply of goods or services, or any benefit of ‘input tax credit’, must be passed on to the recipient (for example, customer) by the registered person (e.g., trader) through a commensurate reduction in prices.
Thus, if a trader is paying, say, Rs 100 less in the new tax rate on a certain item, he has to compulsorily sell that item for Rs 100 cheaper, so the customer benefits proportionally. Failure to do so would mean the trader is indulging in ‘profiteering’.
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Sec 171 also states that the central government would set up an five-member authority to check whether input tax credits availed by a “registered person”, or reduction in tax rate, have been proportionally passed to the customers of those goods or services. Industry is not sure how this will be implemented in practical terms.
This authority is free to decide the methodology to determine if reduction in rate of tax on the supply of goods or services, or the benefit of input tax credit, has been passed on to the customer through a commensurate reduction in prices. The authority also has the power to impose a penalty, order a reduction in final prices and cancel the registration of any person or entity that indulges in ‘profiteering’.