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Removal of tax credit leaves restaurant industry with bitter taste

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The Indian restaurant and food service industry has had a bumpy ride over the last 20-odd months and more so after demonetisation. While eateries were coming to terms with the note ban, those located on highways were served with another jolt in the form of a liquor ban starting April 01, 2017. This was followed by implementation of the goods and services tax (GST) from July 01, 2017 that led to major operational complications for the business owners.

Rajeev Matta, chief executive officer, Sanjeev Kapoor Restaurants (SK Restaurants), said, “First, the rate was 18% but with input tax credit (ITC) available. Later on, it was changed to 5%, without ITC. We didn’t know whether to celebrate or sulk. GST impact reduced our revenues and it took next six months for the business to come back on rails again. Also, GST doesn’t apply on liquor sales. It’s still under value added tax (VAT) by states. Most players have passed on the benefit to the customers of reduced GST as the government expected from them.”

The highly competitive Indian food services market (organised and unorganised), according to a 2016 report by the National Restaurant Association of India (NRAI), is pegged at Rs 3,09,110 crore and is projected to grow at a compounded annual growth rate (CAGR) of 10% to reach Rs 4,98,130 crore by 2021. It is about 1.6 times the size of railways and about eight times the size of the hotel industry. It directly employs six million people and is expected to generate nine million jobs by 2021.

According to Rahul Singh, president, NRAI, and founder and chief executive officer, The Beer Café, the restaurant industry is the only industry which does not receive ITC on GST. “The very concept of ITC is central to and is, in fact, the raison d’être of GST, which is to prevent cascading of taxes (tax over tax). There are three large service industries closely linked with us i.e. banking, insurance and real estate. All these industries in the GST regime have been allowed ITC on any supply of goods including capital goods, but have not passed on the benefit by reducing the cost. Removal of ITC for restaurants is not only curbing growth of this otherwise promising sector but hurting it badly,” he said.

When any cost in a business increases, the entrepreneurs’ margin is at risk feels Ravi Wazir, a restaurant business expert and author of ‘How to start your own Successful Restaurant’. “If to protect that margin, the restaurateur loads that cost completely onto his customer, s/he risks loss of business and so must choose how much to absorb and how much to increase the selling price by. With no ITC benefit on expenses like rent, insurance, interest etc. and all other base costs increasing by the day, the prices of food at restaurants will inevitably increase thereby burdening the customer,” he said.

GST has brought in a lot of clarity to the consumer and was intended to be helpful for the business as well. However, costs for restaurant business operators have gone up, thus impacting profitability which is a major concern for organised players.

Zorawar Kalra, founder and managing director of restaurant chain Massive Restaurants Pvt Ltd, said that from a consumer’s perspective GST is great because s/he is now paying only 5% on the total bill and that’s fabulous. “From an industry point of view, allowing ITC at a reasonable GST rate for the organised players in the restaurant industry will work wonders too. Removal of ITC is impacting a lot of organised players on the brink of survival,” said Kalra adding that passing on the cost to the customers is not a viable option for restaurateurs.

While there are challenges, industry experts feel GST has brought in lakhs of goods and service providers into its fold and the increased collections from these new taxpayers have been substantial, which is great for the country. “It’s heartening to see a large number of food and beverage (F&B) enterprises clean up their act and transition to the side of legitimising their transactions by joining the GST initiative. This is good for the industry, as it might strengthen our case when placing issues before government bodies,” said Wazir.

What has also changed for good is that those taking short-cuts while opening a new restaurant are now taking a systematic approach to the business. “GST has performed very well and is encouraging people to pursue the organised approach which is a big plus point. The 5% rate has led to reduced prices to the tune of an average 10% for customers. The flip side though is the removal of ITC benefits that have added significantly to the project costs and this may impact expansion plans. The latest ban on the use of plastics has only added to the costs while significantly impacting the delivery business,” said Hemang Bhatt, co-founder and managing director, HAS Lifestyle Ltd and partner at restaurant chain B Bhagat Tarachand.

Interestingly, the quick service restaurant (QSR) operators like Westlife Development (master franchisee of McDonald’s in west and south India) are laughing all the way to the bank mainly due to their scale of operations registering month-on-month and year-on-year same-store sales growth. However, it is the organised restaurant chains that are still working to make GST a win-win situation while their business limps back to normalcy.

In terms of a possible solution to this problem, Wazir said, “The GST Council along with the National Anti-Profiteering Authority could take time to understand the real costs and profits that restaurants make and based on that consider some sort of incentive-based ITC scheme for those who are compliant.”

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