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November 6, 2020

Starbucks guilty of profiteering to the tune of Rs 1.04 crore finds NAA

by CA Shivam Jaiswal in GST

Starbucks guilty of profiteering to the tune of Rs 1.04 crore finds NAA

In its 47-year history, Starbucks has transformed from a single coffee bean store in Seattle to a billion-dollar international coffee power house. Seattle-based coffee monolith achieved something every entrepreneur dreamt of — establishing a new culture and becoming the leading provider in their own industry.

But massive expansion hasn’t come without growing pains.TATA Starbucks Private Limited, formerly known as Tata Starbucks Limited, is a 50:50 joint venture company, owned by Tata Consumer products and Starbucks Corporation, that owns and operates Starbucks outlets in India.Anti-profiteering watchdog, the national anti-profiteering authority (NAA) has ordered Tata-Starbucks to deposit Rs 1.04 crore, that it allegedly profiteered by overcharging customers and not passing on GST rate cuts to them.

The National Anti-Profiteering Authority (NAA) is the statutory mechanism under GST law to check the unfair profiteering activities by the registered suppliers under GST law. The Authority’s core function is to ensure that the commensurate benefits of the reduction in GST rates on goods and services done by the GST Council and of the Input tax credit are passed on to the recipients by way of commensurate reduction in the prices by the suppliers.

Reduction of GST Rate

  • Input Tax Credit (ITC) basically means reducing the taxes paid on inputs from taxes to be paid on output.
  • When any supply of services or goods is supplied to a taxable person, the GST charged is known as Input Tax.
  • According to Section 16(1) of the CGST Act, Every registered taxable person shall, subject to such conditions and restrictions as may be prescribed and within the time and manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
  • The GST Council had reduced the rate from 18% to 5% without the benefit of input tax credit on restaurant services.

Anti-profiteering measures under GST

  • According to Section 171 of the CGST Act, any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
  • The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
  • However, no penalty shall be leviable if the profiteered amount is deposited within thirty days of the date of passing of the order by the Authority. 
  • The expression “profiteered” means the amount determined on account of not passing the benefit of reduction in rate of tax on supply of goods or services or both or the benefit of input tax credit to the recipient by way of commensurate reduction in the price of the goods or services or both.

What was the charge against Starbucks?

  • Tata Starbucks, had hiked the base price of a specific coffee product after the GST Council cut tax rates on restaurant services from 18% to 5% with effect from November 15, 2017.
  • This kept the retail sale price of the product (pre- and post-GST rate reduction) the same.
  • The NAA order stated that it was established that Tata Starbucks had profiteered to the tune of Rs 1.04 crore during the period from November 15, 2017, to June 30, 2018, which it was required to pass on to the buyers by commensurately fixing prices of products after taking into account the impact of denial of the input tax credit, which it has not done.
  • According to the anti-profiteering rules under GST, benefits of the input tax credit should have been passed on to the recipient by way of commensurate reduction in prices.
  • Since consumers cannot be identified, the profiteering amount has to be deposited in the consumer welfare fund of the Centre and states.

Argument by Tata Starbucks rejected by NAA

  • The NAA rejected Tata Starbucks’ arguments stating it was a part of a regular bi-annual price increase in October, but did so in November 2017 as it was upgrading its information technology system due to GST implementation.
  • It argued that it followed a policy of revising prices twice a year by 7-8%, depending on the prices of the products and adopted a practice of differential pricing, depending on the area of operation.
  • According to the complaint, the coffee chain had increased the price of its ‘short cappuccino’ from Rs 155 to Rs 170, when the GST rate reduction came into effect.
  • The directorate general of anti-profiteering had, in fact, calculated profiteering to the tune of Rs 4.51 crore.

Since the penal provisions under the anti-profiteering law came into effect in January, Tata Starbucks cannot be imposed a penalty since the case pertains to an earlier time.A Tata Starbucks spokesperson said thatas a responsible business, Tata Starbucks will comply with the ruling. Tata Starbucks intends to explore legal options on the basis of the belief that it has followed the law in accordance with the revision of the GST structure.

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