The complicated tax structure followed in India has always been confusing to the public. In order to make the tax system much simpler, the India Government came up with the policy of ‘one-nation-one -tax’. The first step in this regard is the Goods and Services Tax or the GST bill. As per the GST Bill, it will charge only a single tax on all consumers. The major benefit is that it relieves the consumers from all other direct and indirect taxes.
The restaurant industry has also been impacted hugely by the introduction of GST. As per the Week, the size of India’s restaurant industry is estimated at Rs.4.2 lakh crore and organised restaurants account for 35 percent of the industry.
The tax system prior to the introduction of GST
Before assessing the impact of GST on restaurants, let’s look at the taxing structure in the pre-GST world. During those times, there were 3 major components in the restaurant bill.
- VAT (Value Added Tax) – This is the tax levied on the food consumed by the diners.
- Service Tax – The component stands for the tax charged on the services provided by the restaurant.
- Service Charge – It is a charge applied by the restaurants. It’s an income to the hotels and should not be confused with service tax. This element does not fall under the tax component. It is just an amount collected from the consumer and submitted to the government.
Under the GST regime, the manufacturer has to pay GST on the value added, whereas the consumer will have to pay the tax only on the retailer’s margin. A major advantage of GST for traders is that the tax will remain same across the country. Thus, they can purchase the raw materials from any part of the country at a cheaper rate. From the perspective of end consumers, it is much easier for them to understand the final bill as it only consist of GST.
As per the new GST regime, the restaurants are divided into 3 categories. They are
- Stand-alone restaurants
- Restaurants stationed inside hotels
- Outdoor catering
Standalone restaurants – The standard GST rate of 5% is applicable for all restaurants irrespective of whether it is air-conditioned or they serve alcohol or not. Under this category, the input tax credit (ITC) cannot be claimed.
Restaurants stationed inside hotels – If the room tariff falls under Rs.7,500 you have to pay a GST of 5% and the ITC cannot be claimed. For those restaurants where the room tariff is more than Rs.7,500 the applied GST is 18% with the benefit of ITC.
Outdoor catering – For all those restaurants that have an outdoor catering (not on the premises of restaurant) are required to pay 18% GST. In these cases they can avail the ITC.
It is to be noted that restaurants that come under the 5% GST slab and have an annual turnover of more than a crore cannot claim the input tax credit. Those restaurants that fall under the 18% slab can claim the ITC.
The impact of GST on restaurants
Sharp rise in rentals – With the introduction of GST, Input Tax Credit was removed. For the restaurants they cannot claim the GST paid on raw materials and rentals. As per restaurants, the capital expenses and the rental cost shot up by 15-18%.
Halt in expansion plans of multiple chains –The restaurants that were planning to expand multiple chains have kept their expansion plans on hold. Instead, they are focusing on the 5 star hotels in order to avail the Input Credit Tax.
Shift to online food delivery business – The revised tax policy has made many restaurants to start an online platform. The major benefit of online business is that there is no need to pay huge rentals, unlike a brick-and-mortar restaurant. With the help of digital restaurant management system such as inresto POS , you can easily integrate multiple platforms such as third party aggregators, websites and more.
There is absolutely no need to worry about the latest GST regime. With the help of a modern day POS, it is quite easy to reconcile the GST applicable to you.