At a time when the country is witnessing rampant profiteering in every healthcare related product, such as N-95 masks, sanitizers, protective gear for health care workers, the National Anti-profiteering Authority (NAA) that was set up to ensure tax benefits were passed on to consumers under the GST (goods and services tax) regime, is busy chasing businesses that have been decimated by their near closure in the past six months.
According to a report in ‘The Financial Express
’, the NAA has started multiple anti-profiteering investigations into international fast food brand Subway’s franchisees across the country. We learn that the NAA is also going after the parent company in India over royalty earned on the profiteered amounts. Action against the quick service chain began sometime in August 2018 when NAA began to investigate them for not passing on cuts in goods and services tax (GST) rates to consumers on select products.
NAA was established in November 2017 as a forum to ensure that firms passed on the benefit of GST rate cuts to consumers. In 2019, the government extended the original two-year tenure of the body.
In April 2020, when the country was in the midst of a hard lockdown and all restaurants were shut, the NAA found two Subway franchisees (one each in Rajasthan and Maharashtra) guilty of not passing the GST rate cut benefit to consumers. It has now served notices and initiated action against franchisees all over the country.
NAA has alleged that although GST was reduced from 18% to 5% but without any input tax credit (ITC), this was not passed on to customers and that base prices of different items had been increased more than needed, to offset the impact of the denial of ITC. Many franchisees disagree with NAA’s method of cost calculation but the agency has gone ahead and initiated action on the argument that reduction in prices had to be uniform across products.
As reported by FE, “the NAA had found two Subway franchisees, one each in Rajasthan and Maharashtra, guilty of profiteering earlier this year. This has led to investigations into a wider network of Subway franchisees, a source said. He added that NAA often expanded the scope of the probe into multiple items sold by a business found to have profiteered from one item”.
In one case decided by the Delhi High Court on 23rd September, Gaurav Sharma Food Industry was ordered by the court to deposit the principal profiteered amount
but imposition of interest and penalty was stayed. While the Gaurav Sharma case involved a small sum of Rs7 lakh, there are others who have been asked to cough up as much as Rs80 lakh and they have been asked to deposit half the sum, which they are in no position to pay without liquidating personal assets or damaging their business further by squeezing liquidity even further.
The impact of NAA’s action has been devastating for several franchisees that are struggling to survive the economic impact of the pandemic. They are faced with a Hobson’s choice of paying up and facing a further liquidity crunch, or filing litigation which is not only slow and expensive but in a couple of cases, the courts have asked them to deposit a sizeable portion of the amount allegedly profiteered in NAA’s orders into the Consumer Welfare Fund (CWF).
To many of the franchisees, the timing of the action is almost Kafkaesque. While the rest of the world is helping businesses get back to their feet, the Indian authorities seem intent on shutting them down, says one franchisee. He points out that all Subway outlets are making no money even after re-opening for business. “We are only keeping the business going to remain afloat in the hope that things will return to normal in a few months”, he says. With no walk-in or direct customers, the biggest chunk of their earnings (nearly 22%) is swallowed by the delivery operators like Swiggy and Zomato. According to him, the cost break up for every franchisee is as follows: food costs at 40%, franchisee royalties and franchisee advertising fund at about 12.5%, salaries accounting for about 10% of costs, 10-15% on rentals, maintenance, electricity and admin. Most are struggling to avoid losses by trying to cut procurement costs.
While it is nobody’s case that businesses should get away with profiteering, it seems rather strange to pursue businesses for failing to pass on profits in the middle of a pandemic, that too over a tax system that remains very flawed and confused and has itself imposed additional costs on businesses just to comply with its draconian rules.
More importantly, when the finance minister has described the Covid pandemic as an ‘act of God’ it seems bizarre for temporary regulators to work at pushing businesses over the brink instead of helping them to revive, provide jobs and add to economic growth that has been decimated by the lockdown. The NAA was set up in 2017 for a two-year period to ensure that businesses pass on the GST benefits to customers. With the badly-implemented GST refusing to stabilize, NAA was given a two year extension in 2019. A global economic crisis triggered by an unprecedented pandemic may be a good enough reason to wind up NAA rather than allow it to destroy businesses, especially since there are separate sector regulators to deal with those who are profiteering in the pandemic.