Firms can't be selective in passing on rate cut benefits under GST regime

Even as the price of a large cappuccino dropped at a popular multinational food chain after the recent reduction in the goods and services tax (GST) rate, the small or the regular cup continued to cost the same. This was not a solitary case — several companies passed on the GST cut to the consumers of large size food and beverage products while retaining the older price tag for smaller items. In other cases, prices of popular items were reduced, while those of slow moving items or premium products were left unchanged, depending on the economies of scale. 

The pricing aberration, based on the size of a product, has prompted the national anti-profiteering authority under GST to carry out an investigation. The authority wants to ensure that benefits are passed on for every single item on the shelf, but companies and tax experts argue such a move is not feasible.

According to fast-moving consumer goods (FMCG) companies and quick service restaurants (QSRs), they face logistical and commercial challenges to reduce the prices of smaller packs. Amid ongoing litigation in some cases, the industry is awaiting anti-profiteering guidelines for passing the tax cut benefits to each stock-keeping unit (SKU). 

“As per GST rules, benefits must be passed on through commensurate reduction in prices. Companies cannot be selective in that,” said an anti-profiteering authority official. 

According to a senior executive of a large QSR player, “a restaurant is a deemed service provider under the law. The authority should see whether the price of a service has gone down or not, rather than looking at each individual item.” In the absence of anti-profiteering guidelines from the government, the litigation burden on the industry would rise,  the executive said. 

Currently, anti-profiteering investigation is on for Yums restaurants (Pizza Hut and KFC), Subway and Jubilant Foodworks (Domino’s Pizza). In fact, the DG Anti-Profiteering recently passed an order against Domino’s, stating that it had not reduced the prices of all its food products after the GST Council cut the tax rate on restaurants last November to 5 per cent from 18 per cent earlier. The chain passed on the benefit selectively, the order had said. 

 “Industry believes it's not right for the authorities to insist that price reduction should be at each SKU level, particularly in the absence of guidelines to this effect.  Particularly for food chains which are deemed to be service providers, individual SKU of products should not really matter,” said Pratik Jain, partner, PwC India. He added that if the authorities treat them as product companies, enquiry should be limited to the particular item for which complaint has been filed. 

Given the ambiguity and significant ramifications on incorrect interpretation, the government should issue detailed guidelines on the same, Abhishek Jain, partner at EY, said. 

But, some of the companies Business Standard spoke to were guarded in their comments. 

“Subway Systems India Private Limited is fully cooperating with the National Anti-Profiteering Group in its investigation,” said a spokesperson. When asked about the controversy, a Yum spokesperson said, “we hold the highest respect for the law of the land and comply with all applicable government rules and regulations.’’ 

When it comes to the FMCG sector, the cost benefit translates to only a few paise in the case of smaller packs or saches. But the anti-profiteering authority is of view that companies should go by the legal metrology rules and reduce the price of an item to the nearest 50 paise. As a way out, while some FMCG companies have increased the grammage of the products, quick service restaurants have broadly passed on the benefit instead of at the SKU level. 

‘’Benefits need to be passed on for even a sache of product as is the case for a bottle as per the law,” an official at the authority said. 

HUL, for instance, increased the grammage for some products and reduced MRP for others. “The new pricing that we actioned was in terms of MRP reduction in some packs. On low value/price point packs, we have passed on the benefits through higher grammage/ml given on packs to the consumer,” the HUL spokesperson said. “HUL’s clear intent was to pass on the rate reduction benefit to the consumers at the earliest. In this endeavour, we had consciously prioritised packs which were high-selling packs as they provided the maximum value to consumers.”

“While the law says that the benefits must be passed on only by way of reduction in prices, one has to go by the spirit also and allow grammage increase,” said an NAA official.

While this is possible only for the new packaging, for older stocks, the authority is of view that prices must be reduced as per the legal Metrology Act, which says that the fraction of above 50 paise and up to 95 paise will be rounded off to 50 paise. This essentially means that if the price of a Re 1 sachet comes down to 90 paise after the GST rate cut, the MRP should be reduced to 50 paise. If this is not commercially feasible for companies, the profiteered amount must be deposited in the consumer welfare fund, an official pointed out.