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Despite cut in GST rate, little change in eating out costs

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Reactions were mixed from restaurateurs and consumers on Wednesday, when the decision to cut the GST rate on the industry to 5% from 18% took effect.

Eating out didn’t really become cheaper for customers everywhere as expected, as some restaurants increased prices on menus to offset the loss on input tax credit. But some regular customers ordering food or eating out said they benefited. Restaurant operators welcomed the cut in the tax rate and said it could help boost consumption in the long run, but rued the GST Council’s decision to deny them the input tax credit they previously allowed to claim.

Confusion abounded as several restaurants said they would raise prices to make up for the loss of input tax credit — the tax paid on inputs which they were previously allowed to offset against their own GST liability. Losing this facility would increase their operating costs, restaurateurs claimed.

Those dining at Delhi’s popular ‘Punjabi by Nature’ found themselves paying more or less the same for their popular chef’s special dal, as the restaurant hiked prices of the dish to Rs 445 from Rs 395. Including GST, the bill came to Rs 467.25 from Rs 466.10 previously.

“How are these tax cuts helping anyone? I ended up paying around the same amount,” said an angry customer from Bengaluru, who had ordered at Starbucks. The chain on Wednesday increased the base price of its short signature hot chocolate to Rs 170 from Rs 155.

Starbucks said it had ‘adjusted’ prices and the customers should save around Rs 5-Rs 8 on all products after taxes.

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Some customers in areas like Mumbai’s Bandra said their regular haunts such as Shiv Sagar, Karim’s and Papa Pancho passed on the benefits and had not hiked prices of dishes.

Jubilant FoodWorksBSE 1.08 % said it passed on the benefits of GST reduction to all customers of both its Domino’s Pizza and Dunkin’ Donuts restaurants with effect Wednesday.

Mamagoto kept its menu rates unchanged but the chain’s owner, Rahul Khanna, said it will increase prices by 7-10% gradually.

Most restaurant chains ET reached out to said they were in a wait-and-watch mode.

CUSTOMERS TO BENEFIT
Tax experts estimate that despite the potential price hike on menus, the implementation of the 5% GST rate on restaurants should still work out to be cheaper for customers compared with the 18% tax levied previously.

“Restaurants are likely to increase the base price (exclusive of tax) because of the loss of input tax credit. At a ballpark level, because the dip in the tax is substantial (at 13 percentage points) even if there is an input credit loss, that shouldn’t be more than 5-7%. From the customer’s standpoint, the net effect should still be positive and prices should have come down by 5-6%,” said Pratik Jain, national leader, indirect tax, at PwC India.

RESTAURANTS REVISE PRICES
On Wednesday, Indigo Deli revamped prices in its Mumbai outlets. The restaurant said the menus in its outlets in cities like Delhi will reflect the revised prices.

“Input tax credit going away is not good news. We have been compelled to up our prices,” said Anurag Katriar, chief executive of Degustibus Hospitality that runs the chain. “A lower tax is optically a great thing for consumers. In the long run, it will boost consumption and will enhance the tax net. The bills, despite the price hike, should still be cheaper for consumers compared to what they were paying earlier.”

A spokesperson for Hardcastle Restaurants, which runs the McDonald’s chain in the western and southern markets, said the company has substantially reduced the prices of some of its items, including the Big Spicy Paneer Wrap, Big Spicy Chicken Wrap, Chicken Maharaja Mac and Veg Maharaja Mac. It made the decision despite a likely increase in operating cost due to the removal of input tax credit, the spokesperson added.

But, not all were convinced. Social media was flooded with bills that showed higher prices for some items compared with previous rates.

COST TO GO UP
PwC’s Jain said for bigger restaurants, the input credit was substantially large because they would spend more on rentals, capital expenditure and advertisements. “From a policy perspective, it is not a good idea to deny input tax credit as it promotes a cash economy. You prompt people to buy from vendors who may not charge tax as whatever tax you are paying is not allowed as offset. One hopes that this is a temporary measure,” he said.

Zorawar Kalra, managing director of Massive Restaurants that runs Farzi Café and Masala Library, said while he has not taken a call to hike prices, his costs of setting up restaurants will go up. “Rent is a big cost along with capital expenditure. All my restaurants that I build are now more expensive by 18%. We hope the increase in consumer sentiment and propensity to consume will improve sales but that will still not cover other things. Every organised player in the industry will have an increase in operating costs by 8-10%,” he said.

But, Zomato founder Deepinder Goyal said the restaurant industry is lauding the move to reduce taxes. “Overall, post taxes, we expect that eating out and ordering in is going to become cheaper.”

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