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Eating out isn’t getting any cheaper in 5% goods and services tax regime



MUMBAI: Eating out isn’t getting cheaper post the reduced goods and services tax (GST) rate of 5% for air-conditioned (AC) and non-AC restaurants that got implemented on Wednesday, November 15, 2017. That’s because not every restaurant company is passing on the benefits of reduced tax rate to customers, at least not completely.

For instance, during the 18% GST regime, a regular Latte at a McCafe coffee chain in Mumbai was priced at Rs 142 including 18% GST i.e. Rs 120.34 (base rate for the coffee beverage, as per invoice) + Rs 10.83 (9% CGST, as per invoice) + Rs 10.83 (9% SGST, as per invoice). With the tax rate coming down to 5% now, the price of this coffee beverage should have reduced by Rs 15.60 to Rs 126 i.e. Rs 120.34 (taking the same base rate for the coffee beverage) + Rs 3 (2.5%, CGST) + Rs 3 (2.5%, SGST).

Right? Not really!

That’s because McCafe continues to charge its customers, the same amount of Rs 142 for a regular Latte at its outlets. How does Westlife Development Ltd (WDL), the master franchisee of McDonald’s Restaurants in west and south India, achieve this?

Instead of keeping the base price of the coffee beverage at Rs 120.34, the quick service restaurant (QSR) chain increases its price to Rs 135.24 and adds 5% tax – Rs 3.38 (2.5% CGST) + Rs 3.38 (2.5% SGST) – taking the total to Rs 142 and pocketing the difference of Rs 16 (Rs 142 – Rs 126).

When inquired by DNA Money, a WDL spokesperson said, “The government has brought down GST from 18% to 5%, but there has been a removal of input tax credit (ITC). Due to this, our operating costs have gone up by 10-12%. However, at McDonald’s, we believe in giving the best value to our customers, and have passed on the benefits wherever we could.”

Not divulging pricing details, the spokesperson added, “We have substantially reduced the prices of some of our flagship products like the Big Spicy Chicken Wrap, Big Spicy Paneer Wrap, Chicken Maharaja Mac and Veg Maharaja Mac. We have always been open about our prices. Our menu board prices are inclusive of taxes. So, ‘What You See Is What You Pay’.”

While confirming that his restaurant chain is passing on the reduced GST rate benefit to customers, Rajeev Matta, chief executive officer, Sanjiv Kapoor Restaurants (SKR), elaborated on the ITC aspect saying that earlier, on a normal bill after adjusting for the ITC, restaurants were effectively paying 12% to the government.

“Now, without ITC, we pay 5%. Overall there is a benefit to both sides. Whatever we are going to lose by not getting the ITC especially on capex or rentals should be compensated by increase in volumes because of the lower tax rate for consumers,” said Matta whose company operates in 10 countries with over 75 restaurants under brands like The Yellow Chilli, Signature by Sanjeev Kapoor, Hong Kong, Sura Vie, Khazana, Grain of Salt and India Green.

The above explanation makes it clear why restaurant companies are still reluctant about completely passing on the benefits from reduced GST rate to their customers.

Last week, the GST council prescribed a uniform 5% tax for AC and non-AC restaurants, which earlier attracted a GST rate of 18% and 12% respectively. Additionally, restaurants in starred-hotels that charge Rs 7,500 or more per day room tariff were levied 18% GST and were allowed to take input tax credit (ITC). However, restaurants in hotels charging less than Rs 7,500 room tariff were put in 5% GST rate slab while disallowing them ITC.

According to industry experts, the reason for withdrawing the ITC benefit for restaurants is mostly stemming from the reason that the benefit was not being passed on to the consumer. “It has understood the big reason and that was the rate. Once the rate has been slashed to 5% for all categories and ITC benefit withdrawn, they have addressed both issues,” said a top executive from a leading restaurant chain.

The National Restaurant Association of India (NRAI) managing committee members including AD Singh, Anurag Katriar and Nishit Pandey expressed their concern to the finance minister of Maharashtra and GST commissioner Rajeev Jalota in a meeting held on November 14, 2017. Representing the food and beverage industry, the NRAI members discussed the adverse impact of the removal of ITC resulting in loss of ITC on rental and capex having huge impact on the restaurant industry.

It is understood that the finance minister, GST commissioner and his team endorsed the concern agreeing that it is a genuine problem for people in large cities where most restaurants are on rent/lease. “The government officials have invited suggestions on how to address this issue and have asked NRAI to submit possible measures,” said a top restaurateur.

So next time you head out to a restaurant with friends or family, don’t be shocked to see any significant change in your overall bill. In fact, you might have to shell out more depending on the accounting policy of the restaurant!

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