GST Rates for Restaurants - Analysis

GST rates for restaurants has been a hot topic over the last few months. The government is of the opinion that restaurants have not passed on GST benefits to customers and have used GST to increase their profits.

Here is a quick summary of who will gain and who will lose. Detailed analysis is provided below.

You can download the PDF file using the link below:

DOWNLOAD GST ANALYSIS PDF

Taxation at restaurants prior to GST rollout:

Prior to GST, restaurants were subject to VAT and Service Tax and they were able to adopt a model of their choice.

1)      Composite VAT Model: Restaurants paid a fixed percentage of sales as VAT. The percentage varied by state and ranged between 2% to 4% in general. Restaurants opting for the composite VAT model were NOT allowed to charge this amount on the bill to customers. i.e. if a product price was Rs.100, the customer would pay only Rs.100. The restaurant would need to pay 4% of this amount (i.e. Rs.4) as VAT. No input credits were allowed in this model

2)      VAT Extra model: Restaurants could opt for this and charge customer 14.5% VAT extra on the bill. They could also claim input credit for all purchases where VAT was charged.

3)      Service Tax: For all AC restaurants, irrespective of which VAT model they were on, service tax was applicable. This was 6% of the bill value and could be charged extra. Input credit was also allowed for this. This was applicable only for dine-in and not for takeaway and delivery (though there was some confusion around this).

Taxation post GST rollout Phase 1:

1)      Composite GST: All restaurants with annual turnover less than 75 lakhs could opt for the composite model (whether AC or non AC). GST was payable at 5% and this amount cannot be charged to customers on the bill. i.e. The model was similar to the composite VAT model above and effectively, the rate was pegged at a uniform 5% pan India.

2)      GST Extra model: In this model, restaurants could charge GST to customers on the bill. The percentage was 12% for non-AC restaurants and 18% for AC restaurants and was applicable uniformly across all sales channels – Dine-in, Takeaway and Delivery.

Here is where the confusion began:

1)      The government felt that restaurants were pocketing the gains from GST and were conveniently telling customers they need to pay extra (12%/18%) now because of GST and in some ways blaming the government for the price increase.

2)      The government was even more irked because the tax being collected by the government was now lesser than before.

3)      This “Customer pays more, Government gets less and the restaurants gain” situation did not sit well with the government prompting them to make changes and perhaps teach the restaurant industry a lesson.

4)      Unfortunately, point 1 above was true only for restaurants moving from a composite model to the GST model. This segment comprised primarily of value for money local restaurants and some QSR chains – we can assume that both of these put together would constitute over 80% of the industry. It would not be wrong to state that this segment did conveniently use GST as an excuse to charge customers more and pocket the gains. The alternate view on this is that these restaurants held off on raising prices this year (annual price increases are normally in the 5-10% range) because of GST

What the Government did?

1)      In a reactive mode, the government made a decision to lower the GST to 5% across all restaurants and disallow input credit.

2)     This change is more a populist move to appease the larger population that the government has taken steps to lower expenses for them. By increasing taxes to 12%/18% initially and lowering it to 5% now, it will seem that the government is helping the common man. The common man will still be shelling out 5% more than the pre-GST era for their regular dosas, rotis and meals.

3)      The folks most impacted by this move to disallow input credit are the professional restaurant chains who were on the VAT extra model (14.5% VAT chargeable extra to customers in their bills) and the ones who pay their taxes honestly. Now these restaurants would be able to charge only 5% extra to customers and not get input credit. They will have no choice but to increase prices by about 10% to offset the losses and maintain their net margins.

My previous post analyses the decision and long term impact for the industry. 

I have provided below the various scenarios for restaurants in the pre-GST era, in GST phase 1 and now in GST phase 2. 

You can download the PDF file using the link below:

DOWNLOAD GST ANALYSIS PDF