Impact of GST on Restaurants

Goods and Service Tax India

The most awaited decision on the Goods and Services Tax regime has made its way in 4 different slabs. While India marches towards the global league of ‘one nation, one tax’ policy by July 1st 2017, the government has made an attempt to subsume a web of local and central levies into one single tax. Thus the GST council that is being headed by the State and Central government has fixed rates for a host of goods and services, placing them under 5, 12, 18 and 28 percent.

The new GST rates, however is good news for restaurants with a yearly turnover of less than Rs.50 lakh. According to the latest rates, small restaurants will be taxed at 5 percent and other non-air conditioned restaurants will be taxed at 12 percent, while air conditioned restaurants will be taxed at 18 percent. However liquor is exempt from the GST but VAT will be applicable for restaurants serving liquor.

By talking about the impact of the new GST scheme on restaurants, as compared to the previous GST scheme, now your restaurant bill will be less cluttered by the amount of indirect taxes levied in the food bill and components like food costs, taxes on food, VAT and cesses will be subsumed under one GST rate that goes by 7.2 percent on 40 percent of the total food bill after adding service charge. Thus the new GST rates will reduce the taxes on the food bill by approx 9.5 percent.

However this new scheme also comes with its share of advantages and disadvantages. The GST Council finalized different GST rates for hotels and restaurants based on their tariffs and turnover. Budget hotels will attract low or even nil taxes in the case of those charging less than Rs.1000 a day for rooms, while those charging Rs.5000 and above for a day will have to pay 28 percent tax. Thus even restaurants in such hotels will have to pay a tax of 28 percent, upsetting many industry experts. President of National Restaurant Association of India (NRAI) said that “The government has not realized the importance of providing impetus to hospitality and tourism sectors, which are one of the highest employment generating sectors.” Thus the 28 percent slab for restaurants in luxury hotels will directly affect its end customers.

Despite the disadvantages, the new GST rates will play a fundamental role in increasing government revenue. As the GST network is designed to capture all transaction details, it will lessen the amount of corruption. Thus with the reduction of a number of indirect taxes, the cost of doing business, manufacturing cost of products and logistics will see a huge dip due to less checks at state borders and no state taxes.

Positive impacts:-
1. One Nation, one tax policy will help to bring uniformity in the global league for the GST regime.
2. Subsuming various taxes for one tax will help in easy billing for restaurants.
3. Reduction of taxes on food bill by approx. 9.5% will play a key role in attracting more customers at the restaurants.
4. Small scale restaurant owners will benefit by minimum slab of 5-12% tax or no tax, depending on the yearly turnover.
5. The new GST scheme will help in generating government revenue, reduce corruption and reduce business costs for restaurants.

Negative impacts:-
1. The tax bracket for budget and luxury hotels is too wide.
2. Medium scale restaurants will be unnecessarily pulled into the tax slab of 28% tax in these budget and luxury hotels.
3. This will affect the footfalls at such hotels, thus directly and indirectly affecting the footfalls at the restaurants in such hotels.

The new GST scheme has been proposed to bring a positive change in the food and beverage industry but only time will decide its impact on the industry.