Bills, however, may not come down substantially as the govt has withdrawn input tax credit for restaurants where 5% GST is applicable
NEW DELHI: Eating out has become marginally cheaper from Wednesday as consumers will now have to pay less tax on food served in restaurants.
Last week, the GST Council cut GST rates for all restaurants, except the ones located within hotels with room tariffs of Rs7,500 and above and outdoor catering, to 5%. Earlier, the levy was 18% for air-conditioned eateries and those with liquor licences and 12% for non-air-conditioned restaurants.
However, food bills may not come down in line with the expectations of consumers as the government has withdrawn input tax credit for restaurants where 5% GST is applicable.
Under the input tax credit, restaurants could claim an offset on the tax they pay on inputs (essentially raw materials) against the tax on the final products.
According to estimates by Federation of Hotels and Restaurants Association of India (FHRAI), input tax credit accounts for 3-4% of profit of a restaurant.
With the input tax credit out of the system, restaurants are now likely to increase the menu prices to adjust the tax they would pay for buying raw materials.
However, consumers are still likely to benefit as they had to pay 18% GST earlier. That means for a menu price of Rs100, a consumer had to pay Rs118 after tax is added.
Under the new GST slab, assuming a restaurant decides to pass on the input cost burden to the consumers, the menu price would go up by an estimated 10% making it Rs110. With 5% GST, consumer will now have to pay Rs115.50 which is still cheaper.
“The new GST rate is definitely beneficial for the consumer. And there is the feel-good factor of lower GST. So, the propensity of eating out will be higher,” said Rahul Singh, vice-president, National Restaurant Association of India. Singh is also founder and CEO of restaurant chain The Beer Cafe.
Rating agency Icra estimated that dining out should get 7-13% cheaper for consumers. According to Icra, restaurants used to get input credit on products like unpackaged grains, poultry, seafood and vegetables which are exempt from GST.
In a briefing after the GST Council meeting on 10 November, finance minister Arun Jaitley said the council had decided to do away with the input tax credit as benefits are not being passed on to consumers. “Since they did not pass on the ITC (input tax credit) benefit to customers, they will not be eligible for the benefit themselves,” Jaitley said.
On the other hand, the abolition of input tax credit may lead to restaurants dealing with vendors that are not GST registered.
“The industry is already struggling. And this makes things difficult. Doing business with vendors without bills or invoices can’t be ruled out. With input tax credit gone, there is no incentive of buying from GST-registered vendors. Now it makes more sense to buy in cash without bills. This will at least help saving taxes on inputs,” said a restaurant owner asking not to be named.
The food services market in India is projected to grow to Rs4.98 trillion by 2021, expanding at an annual average rate of 10%, from Rs3.09 trillion in 2016, according to the NRAI-Technopak report.
However, footfalls at restaurants have dropped an estimated 30% after imposition of 18% GST on 1 July.
