In November 2017, the GST Council had cut tax rates for all restaurants, except the ones located within hotels with room tariffs of Rs 7,500 and above, to 5 per cent.
After Domino’s Pizza, operated by Jubilant FoodWorks, it’s the turn of three other popular quick service restaurants – Subway, Pizza Hut and Kentucky Fried Chicken (KFC) – to come under the scanner of the National Anti-Profiteering Authority (NAA) for allegedly not passing on GST rate cut benefits to consumers.
Citing an official aware of the development, The Economic Times reported that the agency has questioned their practice of passing tax cuts on select products and not across the board. Yum Restaurants, which runs more than 700 KFC and Pizza Hut outlets in India, in addition to a small number of Taco Bell stores, and Subway Systems India Pvt Ltd have both confirmed the development to the daily.
“We will extend our fullest cooperation to the authorities on any inquiry they may have,” said a Yum India spokesperson, adding “We are awaiting further details from the authorities and are unable to comment further at the moment.” The spokesperson for Subway, which operates 630 restaurants in the country, similarly said that the company is “fully cooperating with the national anti-profiteering group” in its investigation.
In November 2017 – the same month that NAA was set up – the GST Council cut tax rates for all restaurants, except the ones located within hotels with room tariffs of Rs 7,500 and above, to 5%. Prior to reduction, GST was 18% for air-conditioned (AC) restaurants and 12% for non-AC restaurants.
But restaurateurs were reluctant to pass on the GST rate cuts to the customer because the Council had also rolled back the benefit of Input Tax Credit (ITC) for the restaurant industry. The report added that while the restaurant chains have been pushing value with entry-level pricing at Rs 30 upwards on average, prices of products were reduced selectively. On an average, menu items with mass pricing have become cheaper, while premium dishes have become costlier.
Restaurant chains have defended the move claiming that ITC withdrawal impacted their profitability by 10-18% and limited their capacity to make price cuts. Hence, many companies did not reduce prices consistently across menus.
Late last month, the DGAP also served a notice to Jubilant FoodWorks under the GST anti-profiteering rules after the standing committee received complaints from two consumers who alleged that Domino’s Pizza was still over-charging and not passing on the benefit of the tax cut. Before that, in December 2017, similar notices were sent to Hardcastle Restaurant, a master franchisee of McDonald’s.
As per the structure of the anti-profiteering mechanism in the GST regime, complaints of local nature are first sent to the state-level screening committee while those of national level are marked for the standing committee. If the complaints have merit, the respective committees would then refer the cases for further investigation to the Directorate General of Anti-Profiteering (DGAP).
On completion of the investigation within a three month deadline, the latter sends its report to the NAA, which in turn finally passes the adjudication order. Significantly, the authority has the power to cancel registration of any entity or business if it fails to pass on the benefit of lower taxes to consumers.