On November 10, 2017, the GST council in its 23rd meeting at Guwahati, Assam came with yet another rate revision under GST. Out of 228 items taxed under the highest tax bracket of 28%, tax on 178 items were slashed and brought down under a reduced tax bracket of 18%. But the most significant revision came with regards to the GST chargeable by restaurants, wherein the GST was been reduced from 18% to a uniform rate of 5% both for air-conditioned as well as non-air conditioned restaurants alike. On this note let’s do an impact analysis of the above change on customers as well as restaurateurs.
No Input Tax Credit
Although the GST on food sales is reduced as given above, restaurants with annual turnover of Rs 1 crore or more won’t get the benefit of input tax credit (ITC), ie a facility to set off GST paid on inputs( purchases) with final GST( on sales). Prime facie the reduction in GST should make eating out cheaper, but because the mechanism of setoff on input tax credits is withdrawn it will lead to increase in cost of food production and may compel the restaurants to increase their menu prices to compensate the increase in input costs. Let’s understand this with the help of an example.
‘Moga’ a restaurant in Goa makes purchases of raw materials from its vendors who are registered under GST. It pays 18% GST to the vendors for purchases made through them. So for purchases amounting to Rs 10,000 they would have paid GST of Rs 1,800. Assuming there are no other costs, if the restaurant operated on 30% margins, its sales would be Rs 13,000 (10,000+30% on 10,000). Prior to change in GST rates they would have collected Rs 2,340 as GST on sales (ie 18% on 13,000). Thus the total cost to the diner would be Rs 15,340. And the GST paid by the restaurant would work out to Rs 540 (ie Rs 2,340 – Rs 1,800).
Let’s now look at the new scenario. Keeping purchases constant ie Rs 10,000, ‘Moga’ will pay Rs 1,800 as GST on purchases to its vendors. But since the GST paid to its vendors is now not available for setoffs their purchase cost will be added by the GST paid ie Rs 11,800. Since the restaurant operates at 30% margins its turnover would be Rs 15,340 (ie 11,800+30% on 11,800). At the new rate of 5% the GST collected would be Rs 767 (Rs 15, 340*5%) Thus the total cost to diner would be Rs 16,107 (Rs 15,340 + 767) and the GST paid by the restaurant would be Rs 767. Thus despite of significant reduction in GST rate, the consumers may end up paying more as the restaurants will increase its prices by the GST paid on purchases to compensate themselves from the loss caused on account of withdrawal of input tax credit. It would therefore be appropriate for the government to slash the GST rate while keeping input tax credit benefit intact if it wants to make eating out cheaper.
Cuisine is an integral part of India’s rich and vibrant heritage. According to the National Restaurant Association of India’s 2013 India Food Service Report, the current size of the Indian food service industry is Rs 2,47,680 crore and is projected to grow to Rs 4,08,040 crore by 2018 at the rate of 11%. But for these figures to materialise GST should be streamlined. Like for example with the introduction of GST, Value Added Tax (VAT) was to be abolished, but it continues to exist on alcoholic beverages as far as restaurants are concerned, such exceptions need to be removed, and a single tax at a single rate should be imposed so as to give the intended effect of a tax reform to the industry as well as its consumers.
