Starbucks may face fine for ‘profiteering’ after GST rate cut

March 19, 2019

Seattle-based Starbucks, the world’s biggest coffee retailer, operates over 100 stores in India through Tata Starbucks, its joint venture with the Tata Group is under scrutiny of the anti-profiteering authority; which is all set to fine coffee chain Starbucks for not reducing prices of its products after the Goods and Services Tax rate cut.

The tax authorities had questioned Starbucks about its prices and had issued two sets of letters seeking data after GST was reduced and the company has shared data of its prices and costs in a detailed reply to the National Anti-profiteering Authority (NAA).

GST for restaurants, first set at 18%, was reduced to 5% in early 2018, although they could no longer claim input tax credits. This meant taxes paid on raw materials could not be set off against future tax liabilities.
Starbucks had argued that the denial of input tax credits had neutralised the cut in GST and thus its operational costs were not impacted. However, the NAA poked holes in Starbucks’ defence and is close to slapping afine on the company. The NAA order against Starbucks is expected in the next few weeks.

However, experts said assessing the impact of GST changes on restaurants is not easy, given the various operational models they adopt and the absence of a specific framework.

It is difficult to calculate which expenses are actually cost and how much benefit an entity has gained from the tax rate cut. In the absence of a methodology to compute antiprofiteering, it becomes tough to figure out the quantum of benefits.

NAA’s concern is whether prices were reduced after the GST rate cut and if the benefits of input tax credit were passed on to customers. Starbucks did not reduce prices. Tax experts said the anti-profiteering section in the GST framework doesn’t deal with reduced input tax credits, which could pose problems for restaurants.

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