Government takes action against McDonald's

It was always odd that, while the government was trying to make GST simpler for businesses to comply with, it went ahead and legislated an anti-profiteering law. While the government tried to make light of it by saying it would be used in very rare circumstances, the fact that notices have been sent to a distributor for not passing on the GST rate cut on a bottle of Vaseline, to another firm for a beauty product, to a builder for not reducing prices, a dealer for not cutting prices of a honda 

motorcycle and to McDonald’s for the price of its “McCafe Regular Latte” makes it clear the legislation is going to play havoc with industry. McDonald’s, to cite one instance, is known for cutting prices in order to attract customers and it now has to justify why it never reduced prices of its latte drink from Rs 142 while GST rates fell from 18% to 5%. The franchisee, Hardcastle Restaurants, now has to give the anti-profiteering authority an explanation for why it never cut prices and, in addition, has to submit sample invoices of ‘major raw materials used in providing restaurant services’ for each month from July to December 2017.

At some point, it will have to explain how much milk, coffee and other ingredients went into the making of the latte and probably details of how much of corporate overheads like salaries, rentals and royalties as well were apportioned to this drink; and if the anti-profiteering authority is not satisfied, it will have to try and justify this. Now multiply this across products – if, say, there is a complaint about the prices of burgers or fries; and imagine the plight of an FMCG firm that deals in thousands of SKUs. In no product in the world are prices determined of the basis of just costs; they are based on, at the end of the day, an estimate of what the market can bear, that is why companies make money on some products and lose it on others. And, when the market is tough, companies absorb cost hikes, so when it gets easier, they pass them on. But now, after the anti-profiteering action, prices of every item will have to be based on costs at any point in time and a detailed costing sheet will have to be kept ready by each firm; and it is to be hoped the investigating authority doesn’t start challenging why certain costs are what they are because, if they do, firms won’t know what hit them.

And if this is going to be a nightmare for a manufacturing firm, imagine the plight of a services firm that will have to justify its pricing based on the costs of the people it hires. When even a graduate student of competition economics knows that prices are determined by market forces if there are more than a certain number of suppliers – and the markets in which the anti-profiteering investigation is on are all fairly competitive markets – it is not clear what the government is trying to do. Now that it has passed a draconian legislation, its best bet is to put out some guidelines that, for instance, say that no investigations will be taken in markets that are competitive. That will, at least, restrict the damage being inflicted.