Impact of GST on Restaurants

Pramit Pratim Ghosh |Updated on: June 29, 2022

Restaurant industry

The Indian Restaurant industry today, is worth a staggering INR 247,680 crores and is developing at a yearly rate of 11% - estimated to hit INR 408,040 crores by 2018. As per the National Restaurant Association of India’s 2013 India Food Service Report, the segment comprises of 1.5 million eating outlets, employing 4.6 million people, which again, is projected to rise to 8 million by 2018. This growth has been fuelled by a combination of factors: the growth of the great Indian middle class, rapid urbanization, growing awareness of western lifestyles, more women joining the workforce and higher disposable income, to name a few. Not to forget the organised food services industry – comprising the KFCs, Dominoes and Mc Donald’s of the world, as well as the rising new age food booking and delivery start-ups like Swiggy, Foodpanda etc. which are pushing the sector to greater heights.

Post GST, the Government is seeing the opportunity to generate an additional collection of INR 17,000 – 26,000 crores through closer monitoring of tax levy and collection from the unorganized segment. In short, the restaurant industry is clearly a hot segment, and this calls for a detailed insight on the impact of GST on restaurants and the associated stakeholders – both owners, as well as food-lovers across the nation who step out to dine once in a while.

Impact of GST on restaurant owners

As far as restaurant owners are concerned, GST is largely a mixed bag. The following are some of the major implications of GST for the food entrepreneur:

Seamless flow of ITC

In the previous regime, restaurant owners did not have an option to adjust the output service tax liability against the input VAT on goods consumed. Since the input credit from central taxes were not available for set-off against VAT liability and vice versa. This would lead to the cascading effect of taxes, increasing the costs, and thus hiking prices for the consumer.

Under GST, both service tax and VAT have been subsumed under GST, and thus, regardless of goods or services, the credit of input tax will be available for adjustment against the output liability. This will help optimise the working capital of restaurants in general, which they will be able to pass on to their customers, in terms of better prices and better food quality, a positive GST impact on restaurants.

The headache of serving liquor

Service of liquor in restaurant is not under the GST regime and this is a dampener. In such a case, restaurants serving alcohol, will need to maintain two separate stream of transactions, which will increase the cost of compliance for restaurant chains. Not only that, separate bills will need to be provided in case alcohol is consumed – GST for the food portion, and VAT for the alcohol portion. What is more harrowing is that different states will continue to have different VAT rates, leading to operational challenges - definitely a negative GST impact on restaurants.

Composition scheme – Not enough?

Under the GST regime, restaurants with a turnover of INR 75 lakh or below (INR 50 lakh or below in the Special Category States), will be able to avail of the composition scheme. Under this scheme, restaurants will be liable to pay taxes at a flat rate of 5%, but, they will neither be eligible to collect taxes nor claim Input Tax Credit.

However, if one compares this to the similar composition scheme in the previous regime, the benefits have clearly gone down. Under the VAT laws, restaurants not only enjoyed higher limits of up to INR 1 crores but also had to pay tax at a lower rate of 3% - 4% (depending on the state) on the turnover made from cooked food manufactured and sold, without the facility of input tax rebate. Comparing the pre-GST, and post-GST scenarios, the limit of INR 75 Lakh seems too low to get the real benefit, and may not have the requisite positive GST impact on hotels.

Reverse charge nightmare

Generally, restaurants make a lot of supplies from unregistered dealers. Under the earlier regime of VAT, restaurants in general and small eateries under the composition scheme in specific were not liable to pay purchase tax on such purchases made from unregistered vendors.

However, under GST, fortunately, or unfortunately, restaurants have been classified as services, and thus the reverse charge mechanism from the earlier regime has been adopted in the GST regime as well. Under this reverse charge mechanism, restaurant owners will need to pay tax at full rate on all taxable supplies from unregistered persons, which is bound to impact the profitability at some point. However, the daily limit of INR 5000 is bound to have a somewhat positive GST impact on restaurants, especially for small ones.

Going e-commerce a pain

In the GST regime, e-commerce firms will have to deduct tax collected at source (TCS) at 2% (1% each of CGST and SGST) when they make payments to restaurants or vendors using their platform. This will obviously disrupt the working capital of smaller restaurants with lower sales volumes and deter them from going online. While restaurants will still be able to claim input tax credit and get a refund for the TCS that they paid, but until that refund arrives, that amount of working capital will remain blocked. Thus, it can be assumed that the online aggregator model, which a couple of months ago was considered to be one of the best platforms for smaller restaurants, vendors and businesses, will be hit due to TCS. It is possibly due to this, that the government, has taken cognizance of this problem, and has deferred TCS to a later date. However, another headache is bound to be the aspect of mandatory GST registration for all restaurants, who use e-commerce services, irrespective of turnover. That could be a tax burden many will not be comfortable with, and could have a negative GST impact on hotels.

Impact of GST on restaurant goers

The one and only point of interest for most food lovers who love to dine out will be – the GST rates on restaurants. Let us try to understand how the taxes on a food bill look like in the GST regime, compared to the previous regime.

Previous regime

In the previous regime, dining at a standard AC restaurant was considered to be a supply of both goods and services – which is why VAT as well as Service Tax was applicable. On top of the same, one would find the various cesses, such as Krishi Kalyan Cess and Swachch Bharat Cess being applied on the cost.

In short, the taxes applicable were:

• VAT, depending on state=12.5% to 14.5%
• Service Tax, considering 60% abatement on 15% standard rate = 6.0%
• Krishi Kalyan Cess = 0.2%
• Swachch Bharat Cess = 0.2%
• Total Effective Tax = 18.9% to 20.9%

Thus, the previous regime of multiple taxes had a composite levy of both Service Tax and VAT on food and beverages served in hotels which made up to nearly 21% of tax to be shelled out from the pocket of the end consumers.

GST regime

The major impact of GST on hotels and restaurants in the GST regime is, that supply of food and beverages will be treated as a supply of services. Under GST, Service Tax, VAT and all other indirect taxes which were being charged earlier, will be subsumed.

As per the GST Council, the following are the GST rates on restaurants –

• Non – AC Restaurants – 12%
• AC Restaurants – 18%
• 5 Star Hotels & Restaurants – 28%
• Small Restaurants & Eateries – 5% (Under Composition Scheme) paid by hotel on their turnover, wherein there is a probability of this burden being passed on the consumer.

However, as discussed earlier, alcohol will be out of the purview of GST, and thus liquor will attract VAT, as imposed by the respective states. So, if one orders alcoholic beverages and food, one pays GST on food and VAT on alcoholic beverages.

Previous vs. GST regime comparison

A quick GST calculation for restaurants will reveal a clearer picture. If we consider non-AC restaurants, we can comfortably come to the conclusion that the rates have reduced, as only VAT in the range of 12.5% to 14.5% was chargeable, whereas the GST rates on restaurants in the non-AC category is 12%. Even if someone goes to an AC dine-in, and does not have alcohol, the GST rates on restaurants are still more or less the same at 18%. However, a 5 star hotel is surely bound to be a costlier affair.

But still, many restaurant goers are unhappy with the GST rates on restaurants. The reason is the presence of yet another component – the Service Charge!

Service charge? – to pay or not to pay

Service Charge was being levied even in the previous regime, but among the bevy of taxes, it was potentially considered by many consumers as “just another tax”. Thanks to the clarity of taxation brought in by GST, the service charge question has come to the forefront.

To begin with, service charge is not a tax. The government has not ordered any restaurant to levy service charge, and this is a charge, which is charged by restaurants as per their own discretion. In other words, one can call it as a “tips”, which is generally calculated at 10% of the price of food products that one orders. Ideally speaking, it should be completely the customer’s call on whether they want to pay service charge or not, and even the central and state governments in recent times, have clarified, that a consumer can potentially sue any restaurant establishment, if forced to pay the same. However, even after GST, many restaurants continue to charge it, sometimes before the levy of GST rate, sometimes after, leading to a lot of confusion among the community of food lovers.

Conclusion

With the ushering in of seamless tax credit and rationalization of Indirect tax structure, the impact of GST on restaurants will primarily be - administrative ease, clarity for consumers and improved service quality in the restaurant industry. A single slab will now create a uniform price and will result in direct benefit to the consumers in the form of a lower and easier to read bill when they dine out. Increased consumption will result in job creation and boost the Make in India initiative. This also provides a level playing field for organised players who have to continuously battle with competition which is rife with tax evaders and non-compliant entities. The only dampener potentially is, the need for maintaining accounts and records in order to be GST compliant, and the fact that liquor, as of now, remains out of the GST purview, both of which lead to operational hassle. However, the overall streamlining of taxes, input credit is bound to bode well for the industry in the long run.