The Goods and Services Tax (GST), which was introduced in India on July 1, 2017, is a consolidated indirect tax that substituted various central and state taxes in the quest to establish a single common system of taxation in the country. Its vision is to simplify the process of taxation, prevent the cascading effect of the tax, and enhance the ease of doing business. In the GST regime, businesses are charged with the value added at each stage of the supply chain to make it easy for the flow of credit and thereby ensuring more compliance and transparency. GST has extensive coverage over industries and sectors with each of them having a different rate of taxation, exemptions, and compliance procedures. GST affects all the sectors of the economy, i.e., manufacturing, services, trade, construction, hospitality, education, and health. For instance, while the manufacturing and trade sectors benefit from input tax credits, service industries have adjusted to the destination basis of GST. Essential services such as education and medical care are largely exempted, while luxury items and services are taxed at a higher level. It is important that industries know how GST works across different sectors in order to remain compliant, achieve maximum tax benefits, and properly conduct their business. This knowledge also enables policymakers to assess the effect of taxation on economic growth and sectoral advancement.
Scenario of the Food and Restaurant Business / Industry Before GST
Before the introduction of the Goods and Services Tax (GST) in 2017, the tax regime for India’s restaurant and food industry was fragmented, complex, and frequently onerous for customers and business owners alike. The central and state governments imposed numerous indirect taxes at multiple levels, leading to a cascading tax effect and compliance problems.
Before GST, the food and restaurant industry was marked by tax complexities, high compliance costs and low transparency. Business suffered with multilayered taxation and inconsistent laws thereby limiting growth and efficiency. The need for an integrated and uncomplicated tax structure was a big driving factor for the industry to adopt GST.
1. Multiple Taxes and Authorities
Restaurants and food business companies were taxed by a range of taxes including:
- The Central Government imposes a 15% service tax on air-conditioned restaurants and restaurants selling spirits. State governments impose Value Added Tax (VAT) on sales of food at 5% to 14.5% depending on state and type of food.
- Luxury Tax is imposed by some states on luxury restaurants and hotels. Central Excise Duty is paid by packaged or processed foods. An entry tax (octroi) is charged by local bodies on goods entering municipal limits.
2. Cascade Effect of Taxes
The most critical problem was the absence of input tax credit in all tax categories. For instance, service tax incurred on services availed by restaurants, like rent or advertisement, could not be offset against VAT received on food sales. This created a tax-on-tax effect, increasing the total burden on consumers.
3. Lack of Uniformity
The tax system varied significantly from state to state, resulting in inconsistency and confusion, especially for restaurant chains with operations in numerous jurisdictions. Each state had different VAT rates, compliance processes, and tax filing requirements, rendering the tax system complicated and unpredictable.
4. Compliance Burden
Restaurants need to register separately for service tax and VAT, maintain two books of accounts, and make multiple returns. This meant much greater administrative costs and compliance, especially for small and medium enterprises.
5. Price Complications
Pricing was not transparent owing to the numerous layers of tax involved. The customers were often bewildered by the different segments for VAT and service tax appearing on their bills. Additionally, the dual-tax system hindered restaurants from consolidating menu prices since taxes were calculated separately for each part of the bill (food and services).
6. Impact on Profit Margin
The lack of ability to recover input tax credits, combined with an elevated effective tax rate, decreased profit margins, particularly for mid-scale and high-scale eateries. The cost of operations was high due to inevitable charges on utilities, leases, and commodities.
Current Scenario With GST On Food And Restaurants
The introduction of the Goods and Services Tax (GST) in July 2017 has made a huge impact on India’s restaurant and food industry. By replacing the erstwhile multi-tax regime, GST has rationalised the indirect tax regime, making it more transparent, consistent, and compliant in the sector. Its impact has been twofold, affecting prices, tax burdens, operational processes, and customer experiences in the restaurant and food service sectors.
Implementation of GST has transformed the food and restaurant service industry in India by creating a more transparent, uniform, and simpler structure of taxation. While the abolition of input tax credit has raised the operational cost, particularly for dine-in and high-end restaurants, the overall structure has facilitated ease of compliance and formalisation. With changing consumer tastes, digital expansion picks up pace, and food service demand increases, GST keeps affecting the operation of restaurants, setting their prices, and managing their finances in a competitive and regulated world.
1. Unified Tax Structure
The GST regime has done away with the previous system of various taxes, such as VAT, service tax, excise duty, and luxury tax, and substituted it with a single tax structure with uniform rates across the country. Restaurants now charge a uniform GST rate based on their category, resulting in a simplified billing process and uniform tax application across states.
2. GST Rates For Restaurants
The GST Council classifies restaurants under various slabs depending on their nature and location.
- For takeaway and delivery services, standalone restaurants, cafes, and food stalls (air-conditioned or not) attract 5% GST without Input Tax Credit (ITC).
- 18% GST with Input Tax Credit: For restaurants in hotels charging room tariffs of more than Rs. 7,500 per night.
- Food delivery apps like Swiggy and Zomato attract a 5% GST. From January 2022, the platforms are required to collect and pay GST on behalf of restaurants directly.
3. Input Tax Credit (ITC) Limitations
Restaurants would initially claim input tax credits on goods and services consumed to operate the business, including raw materials, kitchen equipment, furniture, and services such as maintenance or advertising. The GST Council subsequently eliminated ITC credit for restaurants that levy 5% GST to minimise revenue loss and tax evasion. Consequently, restaurants now have to pay 5% GST on sales but are not allowed to claim credit for input taxes. This has resulted in rising operational expenses, particularly for medium and high end restaurants.
4. Simplified Compliance and Billing Processes
GST’s introduction has hugely eliminated the multiple registrations and returns complexities of the old system. Restaurant operators need to register under GST depending on their turnover and file periodic GST returns monthly or quarterly. Further, they are able to raise billing transparency among clients through issuance of one single invoice clearly disclosing the GST amount.
5. Impacts on Food Delivery Platforms and Cloud Kitchens
The rollout of the GST system brought online food aggregators and cloud kitchens under the formal tax system. Swiggy, Zomato, and Uber Eats are now required to charge a 5% GST on orders, which promotes transparency and increases tax compliance among small and cloud-based food businesses. In addition to this, cloud kitchens that do not have dine-in spaces are governed by the same GST laws as conventional restaurants, thus promoting formalisation in the food service industry.
6. Improvements in Consumer Experience
The GST regime makes invoicing easier for consumers as it shows a single tax component as opposed to multiple ones, resulting in better price clarity and consistency. However, some restaurants have hiked up their prices to make up for the loss of Input Tax Credit (ITC), mainly in the urban and high-end dining segments.
7. Restaurant Challenges After GST
Even with its advantages, the GST regime has several challenges:
- The operational costs of most restaurants have gone up because of the absence of input tax credit.
- Periodic changes in GST notifications and compliance regulations require constant updates and comprehension.
- Small restaurants struggle with technology and infrastructure for compliance and e-filing.
- Conflicts between GST and voluntary service charges persist, leading to customer complaints.
8. Industry Benefits
- Reduction of various taxes results in minimised tax cascading.
- Streamlined corporate operations with one unified compliance regime.
- Increased transparency and reduced tax evasion.
- Enhanced digital payment and invoicing practices.
- A level playing field for unorganised and organised players.
GST Rates for Food Products and Restaurants
GST charges on restaurant and food services aim to find a balance between customer affordability and the needs of government revenue. Necessary and basic foodstuffs are exempt, while added value or luxury goods are taxed more. Restaurant taxation is streamlined, yet most service providers are capped in input tax credit.
Food items and restaurant services are taxed differently in India under the GST regime, based on their nature, type of service, and location of supply.
GST Rates on Food Products
Food is taxed according to whether it is a staple, processed, or luxury food.
- Staple food items like fresh fruits, vegetables, milk, eggs, rice, and wheat are not subject to GST (0% rate). These are unprocessed and unbranded items that are eaten on a daily basis and are exempt from tax for the general population’s benefit.
- Packaged and branded food items, such as rice, flour, lentils, and cereals, have a 5% GST levied on them. When a food item is sold and packaged under a brand name, it falls outside the exempt category.
- Processed food items such as biscuits, butter, cheese, frozen vegetables, edible oils, and packaged foods are taxed at 12% GST in general.
- Luxury or ready-to-consume food items such as chocolates, ice cream, and soft drinks are taxed at 18% or more, with aerated drinks selling for 28% GST and additional cess.
GST Rates For Restaurants
GST rates for restaurants depend on business type, location, and services rendered:
- Non-air conditioned, as well as air conditioned, regular restaurants pay 5% GST. But they cannot avow Input Tax Credit (ITC) for restaurant related items and services.
- Restaurants operated by hotels which have room tariff of Rs. 7,500 or higher per night face a higher GST rate of 18% along with ITC eligibility.
- Hotel restaurants run with room tariffs below Rs. 7,500 face an identical 5% GST slab as standalone restaurants without ITC.
- Catering services made outdoors are mostly charged at the rate of 18%, complete with ITC benefits.
- Food delivery aggregators like Swiggy or Zomato are charged with a 5% GST and have to withhold and remit it directly.
Conclusion
The implementation of GST has greatly changed the tax structure in India’s restaurant and food industry. By merging different indirect taxes into one system, GST has improved tax transparency, uniformity, and efficiency. While it has simplified invoicing and compliance procedures, issues like the disallowance of input tax credits for most restaurants have raised operational costs. However, GST promotes formalisation and accountability in the sector. In order to successfully control expenses in providing high-quality service and fair prices to consumers, companies need to have an in-depth knowledge of the prevailing rates and regulatory requirements.
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