On Friday, the Goods and Services Tax Council lowered the tax rate for restaurants (barring those located in luxury hotels) to 5%. The Council takes all major decisions regarding the Goods and Services Tax, which subsumes all Central and state levies and was introduced on July 1.
On the face of it, this decision comes as a relief to restaurant owners as well as customers who had complained of the previously high tax rates of 18% for restaurants with air-conditioning and 12% for those without. But many restaurant owners are not sure how this will affect their businesses while some have even indicated that the move may drive prices up instead of down.
This is because the government has also done away with input tax credit in the restaurant business. Under input tax credit, businesses can claim an offset on the tax they pay on inputs against the tax they pay to the government on final products. But after Friday’s decision, a restaurant is no longer entitled to claim input tax credit on the food items it uses as raw material.
The input tax credit accounts for 3%-4% of a restaurant’s profits, according to Federation of Hotels and Restaurants Association of India president Garish Oberoi. The federation, however, welcomed the lower tax rate.
Restaurants located in high-rent areas – which attract a high Goods and Services Tax rate of 18% on commercial rents – may be hit the hardest. “The move will hurt certain sections of the industry for sure but we cannot have all sections happy at the same time,” Oberoi said. “Five per cent is the lowest rate possible but input tax credit was important for some establishments, which will now perhaps struggle in the short term.”
Menu prices to rise?
A restaurant owner in Delhi, who did not want to be identified, said he was thinking about raising prices on his menu as a result of the government’s decision. He reasoned that customers would still be paying the same amount as the lower tax rate would balance out the higher food prices.
Calling the government’s move an opportunity for restaurants “to raise our rates on the menu and recover some of the losses we have been making”, he said, “The 5% rate for consumers is great. It allows legroom for restaurants who were being threatened by bigger chains or more organised establishments to now sell the same commodity at the same price without letting the customer feel its effect.”
Many restaurant managers, however, are not convinced that a lower tax rate will make up for the loss of input tax credit.
“We are already a struggling industry and you decide to strangle it like this,” said Nitin Kapoor, an independent marketing consultant who manages four hotels in high-footfall areas in Delhi. He explained that “footfalls dropped by 30% compared to last year when GST came in”, and that profit margins had already been dealt a blow by earlier government decisions to reduce the number of bar licences and ban the serving of hookah. In addition, inputs such as employees’ salaries and electricity were not eligible for input tax credit.
Kapoor said the decision to do away with input tax credit altogether may encourage restaurants to do business without bills. This would be contrary to the new tax regime’s objective to bring about greater transparency in transactions.
“With input tax credit gone, whatever little incentive I had to buy from formally GST-registered suppliers has now vanished,” he said. “I will now buy in cash without bills because those things are useless to me and save my own taxes on my inputs too.”
Good for business
However, the rating agency ICRA expects the government’s decision to reduce dining out costs and bring in more customers.
“Restaurants were not passing on any benefit of input tax credit to consumers under GST,” the agency’s vice-president and sector head Pavethra Ponniah said. “The 12%-18% GST earlier had led to a hike in cost of dining for consumers. This revision in GST rates for restaurants is positive as it would bring down dining out cost, supporting footfalls and revenues at a time when most organised restaurants are struggling to grow demand.”
The Federation of Hotels and Restaurants Association of India – which had earlier lobbied for a 12% Goods and Services Tax rate for all categories of restaurants – agreed. The industry body had previously demanded that input tax credit be kept intact, but in light of the government’s decision to lower the tax rate to 5%, it has changed its position.
“We did not expect the government to reduce rates to such an extent that it would go from 18% to 5% in one go,” said its president, Garish Oberoi. “Though the input tax credit has gone away, we expect more customers to come in and the hotel industry to grow in general.”