GST Rates reduced but prices remain the same? Wait for December…

On 10th of November 2017, the GST Council emerged out of its meeting at Guwahati, raining GST rate cuts on businesses. GST rates on about 178 items was reduced and the 28% GST slab was pruned. The one rate cut which got the most attention was the one on restaurants. The GST Council had announced that restaurants would now charge GST at 5% instead of 12% or 18%.

Although the changes were announced on 10th November, they were to be effective from 15th November, once the notifications were out. While many sectors like FMCG and automobile sector had reduced prices explicitly ever since GST came in from 1st of July 2017, the restaurant sector had more or less kept prices the same, choosing not to pass on the benefits of GST. Come 15th November, everyone waited with baited breath to finally see restaurants fall in line, thanks to the major cut from 12%/18% to 5%.

We had explained in a previous article that due to something called “input tax credit”, although the rate of GST had come down by 13%, the actual price of food may come down by 3% odd only. But on 15th November, social media users did not get to see even that small a decrease in prices.

- Advertisement - - Article resumes -

Some users found that restaurants were still charging 18% GST. This could be put down to technical issues because it may have taken time to upgrade softwares and billing systems:

Some users reported a minor decrease in the food bill, which could be attributed to the aforesaid reason: Input Tax Credit

But in some cases, like this bill from McDonald’s, people noticed that the bill amount was exactly the same, although tax rate had reduced. The restaurant had increased the price before GST, so that the price post GST matches with the old price:

McDonald’s twitter handle replied to this user saying that owing to the change in rules, they had lost out on input tax credit, which had caused their costs to go up:

This is true, as explained in our previous article. The change in rate and allied rules, means that input tax credit is now a cost. But having said that, it would take an amazing level of coincidence for the costs to rise just enough to match the old selling prices to the exact rupee. Either that, or the costs had actually increased much more, and McDonald’s is absorbing these costs by not increasing prices.

The other possibility could be that the costs have not gone up as much, but by keeping their selling price post GST constant, McDonald’s is pocketing the gains of the GST rate reduction, instead of passing it on to the customers. If this is true, then McDonald’s could be found guilty of “profiteering” in the coming month.

The GST Act always had provisions to deal with such situations. The Anti-Profiteering clause, forbade businesses from gobbling up benefits accruing from GST or cut in GST rates, and asked them to instead pass on the benefits to customers. The concept is based on the principle that taxation changes should not be used by businesses to make money.

Although this clause exists in the Act, there are no detailed guidelines to enforce this clause. In the initial months, it was believed that enforcing this clause may seem draconian since businesses were just getting the hang of GST. But now the honeymoon period seems to be over.

According to a news report, the Government has kick-started the process of devising detailed rules to check for profiteering, and they rules are expected to be out next month. The broad idea is to prescribe a methodology to ascertain whether companies are passing on the tax reduction under GST and benefits derived from input tax credits to consumers. The Government seeks to draw inspiration and learn from similar practices adopted in Australia and Malaysia, when GST was implemented there.

While it is unlikely that smaller businesses would face the heat of these rules, bigger businesses like McDonald’s etc, if found to be violating such guidelines, could be in a soup. It remains to be seen how the restaurant industry responds to the GST rate cut. They may get a grace period of a few days to re-adjust their pricing strategies, but if they continue into next month, the going may get tough.

Share and Support:
Support OpIndia by paying for content

Most read articles recently

‘Will not develop areas which did not vote for me’: Rajasthan Congress MLA shortly after winning

Rajender Singh Bidhuri fought and won a close battle against BJP MLA Suresh Dhakad with a margin of 1661 votes.

Here is why BJP lost elections, and of course, it was deliberate

What BJP supporters need to realise is this - no political party ever wants to lose and least of all, a party led by the two most politically aggressive politicians the country has ever seen.

Ranchi: Court summons Rahul Gandhi for his defamatory remarks against Amit Shah

The petitioner submitted that the statement by Rahul Gandhi against Amit Shah had hurt his sentiments and tarnished the image of the party.

India cannot turn into Islamic Nation, only Modi can understand gravity and do needful: Meghalaya HC

There should be uniform law for all Indian citizens, and anybody opposing the Indian laws and constitution cannot be considered as citizens of the country, Meghalaya High Court noted

BJP has lost the digital and social media edge, but it is not too late to recover

Talented supporters are BJP's key asset. If things start moving now BJP will be able to recover the edge lost by 'IT cell'. The time to act is now.
Modi government vindicated, SC says Rafale Deal clean

SC verdict on Rafale deal: Read scathing comments made by Court while dismissing petitions for inquiry

Supreme Court dismissed petitions for an enquiry into Rafale deal pricing, offset partner selection and procurement procedure. Read scathing observations

Congress friendly journalist wishes death upon BJP Delhi spokesperson Tajinder Bagga

During the run-up to Gujarat assembly elections last year, Trivedi was caught spreading morphed images with Amit Shah's fake quotes on Patidars

Priyanka Gandhi part of selection process of Congress CM in the state where her husband faces probe

Priyanka Gandhi's husband, Robert Vadra, was recently summoned for the third time by the Enforcement Directorate in the Bikaner land deal money laundering case after he missed the first two.

For all his angst against Adani, Rahul Gandhi chose Kamal Nath who rallied behind Adani for power plant in Chhindwara

Kamal Nath is believed to be close to Gautam Adani, whom Rahul Gandhi has frequently accused of being a 'crony capitalist'

BJP’s real woes: Lessons from the electoral semi-finals

The prolonged silence of Prime Minister Narendra Modi and BJP President Amit Shah on election results was very telling. The results were clearly unexpected and possibly led to prolonged internal discussions on the future course of action.

Latest articles

Connect with us


Don't miss these