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Features

Beyond the GST smokescreen

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There has been a lot of noise and debate recently about the changes to GST made in November and specifically, the way it has played out in the restaurant industry. As restaurants adjusted menu prices marginally to cover for the impact of input credit removal, there was understandable anguish amongst consumers who expected prices to go down, not realising that they were nevertheless paying lower overall effective prices after counting for the reduced GST. It is now over a month since the GST change, and a lot of the noise and uncertainty has died down. Most restaurants have passed on the net benefits of reduced GST to consumers, who are beginning to experience significantly lower effective prices when they eat out or order in. Restaurants who have been slow to pass on the GST savings will feel the impact of competitive forces playing out as consumers choose to spend their money elsewhere, and these restaurants will eventually be forced to follow suit. As the dust settles down and with the passage of time, we can now take a more objective view of the GST issue, and the inescapable conclusion is that this is probably the best thing that could have happened to the food services industry.

Bringing the growth back

The Finance Minister, GoM, the revenue secretary and the Government of India have shown tremendous foresight by eliminating the tax difference between the unorganised and organised sectors of the restaurant industry, and reducing GST to 5%. This level playing field will encourage more consumers to upgrade to the organised restaurant sector where there is greater assurance of food hygiene, safety, better ambience and service.
A growing restaurant industry will lead to increased job creation, a much needed stimulus. The industry currently generates direct employment of 5.5-6 million people and indirect employment of an additional 8.5-9 million people. Every additional retail store creates 25-30 direct jobs and a similar number of indirect ones, and a 10% increase in the restaurant network year-on-year could create between 5-10 lakh additional jobs annually. A vibrant food service sector will lead to many entrepreneurs entering with new products and services, and new business models, creating a virtuous cycle of innovation and growth. Additionally, jobs created will be relatively low skill ones, not requiring elaborate technical knowledge. Thus the job creation will happen in the segment most in need of employment, that is, at the entry-level.

Adding to the value chain

Another important role that the organised restaurant industry plays is in organising and driving quality improvement across the agricultural value chain. Restaurants work with farmers and vendors to raise the bar on the quality of agri-produce in order to meet their customer expectations. Farmers in turn benefit by having an assured market and improved realisations for their superior products. The need to transport and store the agri-produce for year-round consumption also facilitates creation of a nationwide cold chain, thus benefiting the overall agriculture sector. It is clear that the growth of the restaurant industry will benefit the overall economy by creating jobs, driving skill creation and strengthening the farm-to-fork connectivity.

So is there something that the government can do to accelerate the growth of the industry? First, there is a clear case for reinstating input credit, especially in specific areas such as rent and capex which will help improve the GST realisation for the government, and at least partially ease the impact of ITC withdrawal on restaurants. In addition, the technical issue of GST being charged on intra-company stock transfer needs to be resolved. Secondly, the sector remains subjected to a large number of local regulations, which often vary even from one municipal area to another. That makes running a restaurant a needlessly complex task; therefore there is an urgent need to drive ease of doing business in this sector as well. In summary, the organised restaurant industry is poised to benefit from some fundamental tailwinds of increasing urbanisation, a younger demographic, more women in the workforce, and growing demand for hygienic and safe food. Reduction of GST to 5% could be a great force multiplier, driving overall growth for the industry and thereby leading to significant job creation for the Indian economy.

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