GST was introduced to expand the tax base and encourage voluntary compliance by providing a seamless supply chain having the facility of ITC.
- By MS Mani
There have been several changes in the Goods and Services Tax (GST) rates applicable to restaurants and the eligibility conditions, after its introduction in July 2017. While at the stage of GST introduction, a distinction was sought to be made between AC and non-AC restaurants with rates of 18 per cent and 12 per cent respectively, this was altered after four months. Since November 2017, the rates have been divided into two categories — standalone restaurants and those which are part of a hotel with prescribed tariffs. At this stage, the GST rate was also brought down to 5 per cent for standalone restaurants, which was widely welcomed as being a reasonable rate. However, it was stipulated that there would be no Input Tax Credit (ITC) eligibility considering the lower rate.
Since then, there have been quite a few changes. The most recent change that came into effect from October 2019 was the rate to levy on all restaurant services, except those provided in a hotel having a room tariff exceeding Rs 7,500 per night; the rate has been kept at a uniform 5 per cent without the facility of input tax credits.
At a broad level, it was visualised that as many of the inputs used by a hotel such as grains, vegetables, fruits etc. would not attract GST, hence using these in the preparation of food items would not result in any ITC loss.
However, what was possibly not considered was that modern restaurants require many input services in order to function and these constitute a significant portion of their expenses. Majority of these expenses attract GST, typically at 18 per cent. Hence the absence of ITC on these expenses leads to a significant increase in cost for restaurants.
The key expense items for modern restaurants include rentals, brand usage fees, advertising and promotion expenses, digital marketing expenses etc. while the cost of food ingredients represents a low proportion of the overall cost. With a large proportion of expense items attracting GST at 18 per cent, the denial of the ITC facility to restaurants saddles them with an additional 18 per cent cost. This also leads to three specific issues:
- Increase in cost to the customer as the GST paid on input services is added to the cost while deciding the pricing of the menu.
- Preference for vendors who do not levy GST – these could be below the threshold limit – or could be vendors who operate in the grey market.
- Encouragement to splitting up contracts to remain outside the GST purview.
GST was introduced to expand the tax base and encourage voluntary compliance by providing a seamless supply chain having the facility of ITC and tax payment on the value addition at every level of the value chain. This principle seems to have been overlooked in case of restaurants on the grounds that the rate of GST itself is kept very low. The fact that GST is an indirect tax that is recovered from customers and paid to the government and is therefore a pass-through tax for restaurant owners, should also be considered. Many restaurant owners would prefer a 12 per cent rate with ITC eligibility as that would bring down their overall costs. This can be provided either to all restaurants or as an option to those who do not wish to operate under the 5 per cent rate.
However, this would also lead to its own set of challenges as customers would be charged a 5 per cent or 12 per cent GST rate for the same service by different service providers. Further, enforcing such a scheme would involve restaurants making a selection at the beginning of the year of the rate that they would charge and the tax authorities having an enforcement mechanism to monitor the same.
Hence, overall it does appear that while the denial of ITC to restaurants has put them in some difficulty, having a dual rate would make it more complicated for consumers and tax authorities.
- MS Mani is a Partner with Deloitte India.