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
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.