The real reason why restaurants, fast food chains raised menu prices after GST rate cut

Fast food chains are raising the menu prices, claiming that the removal of ITC shot up their operational cost. Guess what? ITC was never meant for them in the first place! This table explains the missing link.

A cook slides a pizza onto a serving plate in the kitchen at a Pizza Hut restaurant in Mumbai, March 29, 2011. REUTERS/Danish Siddiqui
Fast food chains are hiking the menu prices saying removal of ITC shot up their operational cost. (Image: Reuters)

By now hikes in the base price of food across fast food chains have created enough furore on social media. In just two days, Jubilant FoodWorks Limited, which holds the master franchise for Domino’s Pizza and Dunkin’ Donuts in India, and McDonald’s reportedly raised the menu prices on at least some of its food products. Analysts say, there could be more such hikes in the times to come.

The reason: Abolition of Input Tax Credit (ITC). McDonald’s justified hiking prices, in a series of tweets, saying that the removal of ITC shot up their operating cost. Very conveniently mentioning that they have “structured the changes in such a manner that total amount paid by the customer remains the same”.

Let’s rewind a little. Before the implementation of the GST, the restaurants were charging the Service Tax and the Value Added Tax. Then came the GST, under which AC restaurants were supposed to charge 18% and non-AC restaurants were supposed to charge 12%. But, there was something called ‘Input Tax Credit’, which was to be passed on to customers.

Now, what is Input Tax Credit? Input Tax Credit is the tax paid on input, or say raw materials. Under the GST, there is a provision that the total amount of tax paid on input (raw materials such as flour, onion, tomatoes) is offset against the total amount of tax paid on output. When government applied 12% and 18% tax slabs, it included ITC — the refund of tax paid on input, but it was supposed to be passed on to customers as a reduction in food price.

In fact, the Central Board of Excise & Customs clarified in a tweet on Twitter, saying that “the actual GST incidence will be lesser due to increased availability of input tax credit”. But, it certainly did not happen. The ITC benefit was not passed on to customers following which the government abolished ITC and reduced the tax rate to 5%.

Here’s an instance to understand it in a better way. A Reddit user posted two bills — one before the GST and other after the GST — saying that after the GST her food bill had surged, which should not have been the case, given the input tax credit refund.

Fresh Pan PizzaQuantityPrice before GSTPrice after GST
Paneer & Onion1Rs 299Rs 299
Chicken Salami Special1Rs 299Rs 299
DiscountRs 192Rs 192
Net PriceRs 458Rs 458
Service TaxRs 27.48
VATRs 22.90
GST (18%)Rs 82.44
Total PriceRs 508Rs 540

As you can see, in both cases, two medium-sized pan pizzas were ordered. The price shot up because 18% GST was applied on behalf of the Service Tax and the VAT, but the menu prices remained the same. So the question is when there was ITC, why the menu prices were not reduced to pass the benefits to customers? FE Online has sought more clarification from the company on the same.

Arun Jaitley while reducing the tax rate to 5%, rightly, said, “Since they did not pass on the benefit of input tax credit to the consumer, they are not entitled to the benefit themselves.”

“Restaurants were getting input tax credit benefit for over four months but they did not pass on the benefits to consumers by reducing prices by even a single penny. Big restaurants were claiming ITC as much as 6-7%. A 5% GST rate with no ITC benefits would mean that now that route is closed and they just need to pass on the GST paid by consumers to the government,” a senior official told The Indian Express.

In summary, what should have happened:

When the GST rate was fixed at 18%, input tax credit should have been adjusted in food prices, and your bill should have remained more or less the same as before the GST regime.

What has actually happened?

When GST rate was fixed at 18%, the restaurants did not cut down the menu prices and allowed your bill to surge. When the government took away the right of input tax credit, the restaurants are now hiking prices to match your surged bill under the GST regime, instead of going back to original prices.

And what they are saying: There has been a removal of Input Tax Credit. Due to this, our operating costs have gone up.The Input Tax Credit which was never meant for restaurants in the first place!

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