1. New GST rate of 5% on restaurants: Menu prices to go up, but bills may still come down! Here’s the math

New GST rate of 5% on restaurants: Menu prices to go up, but bills may still come down! Here’s the math

GST bonanza: With effect from today, eating out in restaurants is set to get cheaper!

By: | Updated: November 15, 2017 5:59 PM
gst on restaurants in india, gst on restaurant, gst rate on restaurants, gst rates on restaurants New GST rates: Experts are of the view that with restaurants losing out on this key benefit, menu prices are likely to go up.

GST bonanza: With effect from today, eating out in restaurants is set to get cheaper! This is with the exception of restaurants in 5-star hotels where the earlier GST rate of 18% is still applicable. The GST Council recently revised the differential tax rates for restaurants (12% for non-AC and 18% for air-conditioned) to a flat 5%. However, the move means that restaurants have been deprived of the input tax credit benefit that they had earlier. Experts are of the view that with restaurants losing out on this key benefit, menu prices are likely to go up. This has many people wondering – will eating out actually get cheaper or not?

We at Financial Express Online decided to get an Indirect tax expert to do the math for you. Says Abhishek Jain, Partner – Indirect Tax at EY, “Most AC restaurants are likely to hike prices now that their input tax credit benefit has been taken off by the government. However, realistically speaking, given the competitive market, this hike is unlikely to translate into an amount higher than what consumers were paying under the 18% GST regime.” Below are three iterations of a representative bill when two people dine out in an AC restaurant. The bills have been made keeping in mind GST@ 18% and 5%. The third bill envisages a scenario where the restaurant hikes prices by the amount of loss from the input tax credit benefit being withdrawn.

GST: Restaurant bill with GST at 18%

Item Quantity *Price Total
Shahi Paneer 1*300 300
Dal Makhani 1*250 250
Butter Chicken 1*500 500
Tandoori Roti 4*50 200
Gulab Jamun 2*50 100
Cold drinks 2*75 150
Amount: 1500
GST @18% 270
Total 1770

GST: Restaurant bill with GST at 5%

Item Quantity *Price Total
Shahi Paneer 1*300 300
Dal Makhani 1*250 250
Butter Chicken 1*500 500
Tandoori Roti 4*50 200
Gulab Jamun 2*50 100
Cold drinks 2*75 150
Total Bill Price 1500
GST @5% on Bill Price 75
Grand Total 1575

Restaurant bill with hikes prices and GST at 5%

Item Quantity *Price Total
Shahi Paneer 1*300 300
Dal Makhani 1*250 250
Butter Chicken 1*500 500
Tandoori Roti 4*50 200
Gulab Jamun 2*50 100
Cold drinks 2*75 150
Amount: 1500
Loss of input credit (say 18% on 300) 54
Total Bill Price 1554
GST @5% on Bill Price 77.7
Grand Total 1631.7

As is evident from the three bills; on an amount of Rs 1500, if 18% GST rate was applied, the bill would be Rs 1770. Now with 5% GST, the bill would be Rs 1575. If however, as expected AC restaurants were to hike prices, the EY expert assumes a scenario where the input tax credit is applicable at around 18% of 300 (assumption of input credit made a percentage of the bill).

In such a case, the bill amount after addition of Rs 54 and 5% tax on Rs 1554 (1500 + 54) would be Rs 1631.7. This is still less than the Rs 1770 that consumers had to shell out under the 18% tax regime. With the input tax credit that the restaurant owner could avail before, the amount of tax that he would pay to the government would be Rs 224 (Rs 270 – Rs 54). Now, with the input tax credit withdrawn, the restaurant owner has to pay the entire tax amount in the bill to the government. At a broad level, input tax credit is the tax that a restaurant owner has to pay on all items that he uses as ” input” to provide food to customers. This includes the tax on branded food items that are purchased to make dishes, the rent of the premises etc.

“So, even though we expect that the entire benefit for the reduction in GST from 18% to 5% will not be translated to consumers by restaurants, a part of it would be. So, consumers will in my view have to shell out less than what they were under 18% GST,” says Jain.

  1. Uday Barad
    Nov 15, 2017 at 5:56 pm
    Why should consumer bear Input Credit of restaurant? And for how many days / months? Will this Input Tax going to remain forever???
    Reply
    1. S
      SHEKAR
      Nov 15, 2017 at 5:38 pm
      Why Restaurant should charge input tax on consumers. They are are charging high prices inspite of several food items prices have come down. Who will pass on the reduction in prices of food items like vegetables, cereals and other grocery items.
      Reply

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