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March 17, 2021

NAA finds Subway franchise guilty of profiteering by denying GST rate cut benefits to customers

by CA Jessica Nagaonkar in GST

NAA finds Subway franchise guilty of profiteering by denying GST rate cut benefits to customers

The popular American restaurant chain, Subway, is the largest fast-food chain in store count. And, it has been growing since its arrival in India in 2001. But massive expansion hasn’t come without growing pains. Anti-profiteering watchdog, National Anti-Profiteering Authority (NAA), found that the Dough Maker India which was the franchisee of Subway India was guilty of denying GST rate cut benefits to customers.

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.

Facts of the Case:

  • It was alleged that the Respondent, Dough Maker India had committed the profiteering in respect of restaurant service, despite the reduction in the rate of GST from 18% to 5% w.e.f. November 15, 2017.
  • It was alleged that Respondent had increased the base prices of his products and had not passed on the benefit of reduction in the GST rate from 18% to 5% w.e.f. November 15, 2017, affected vide Notification No. 46/2017-Central Tax (Rate) dated 14.11.2017 by way of commensurate reduction in prices, in terms of Section 171 of the CGST Act, 2017.
  • The summary sheet of the extent of profiteering was prepared by Applicant which was also enclosed with the reference received from the Standing Committee on Anti-profiteering.
  • The issue was examined by the Maharashtra State Screening Committee and upon being prima facie satisfied that Respondent had contravened the provisions of Section 171 of the CGST Act, 2017, it forwarded the said complaint with its recommendation to the Standing Committee on Anti-profiteering for further action vide its letter.
  • In NAA hearings, restaurants argued that their costs shot up due to denial of ITC, but many orders went against business owners in such cases.
  • Further, NAA also did not consider the argument that prices were reduced more than the corresponding rates on some items while not on others, so the net effect was of passing the benefit.
  • It relied on the stance that price cuts should be uniform on all items in accordance with the rate cut.

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.

Observations of The National Anti-Profiteering Authority

  • The Respondent had denied the benefit of tax reduction to the customers in contravention of the provisions of Section 171(1) of the CGST Act, 2017 and he had thus committed an offence under Section 171(3A).
  • Therefore, the AAR said that the respondent was liable for imposition of penalty under the provisions of the above Section.
  • However, since the provisions of Section 171 (3A) came into force w.e.f. January 1, 2020 whereas the period during which violation had occurred is w.e.f. July 1, 2017 to March 31, 2019, hence the penalty prescribed could not be imposed on Respondent retrospectively.
  • The Authority as per Rule 136 of the CGST Rules 2017 directed the Commissioners of CGST/SGST to monitor this order under the supervision of the DGAP by ensuring that the amount profiteered by Respondent as ordered by this Authority is deposited in the CWFs of the Central and the State Governments.
  • A report in compliance of this order shall be submitted to this Authority by the concerned Commissioner within 4 months.

NAA was established in November 2017 as a forum to ensure firms passed on the benefit of GST rate cuts to consumers. Over 400 items have seen rate revision since GST was launched in July 2017. The government also extended the original two-year tenure of the body in 2019.

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