Restaurant chains say that without an input tax credit (ITC), the move to reduce GST rate from 18% to 12% will increase the final bill for customers
Startups in India’s food and beverage retail industry are planning to increase meal prices for customers even as the government is likely to bring down the rate of GST to 12 percent from 18 percent.
All cafe chains including Chaayos, Social, Smoke House Deli, Wow Momos told Moneycontrol that the food bill is likely to increase for customers by 8-10 percent.
Cafes say that without an Input Tax credit (ITC), the move to reduce GST rate will increase the final bill for consumers.
“Under the earlier tax regime, the tax on processed food was at 5 percent but now under GST, this has gone up to 12 percent. Taxes on many such inputs have gone up, so if we do not get an input credit, then the cost of running the restaurants will go up, leading to higher menu prices for customers,” said Riyaaz Amlani, CEO of Impresario Entertainment & Hospitality Pvt Ltd, that runs Social brand of restaurant cum coworking spaces.
Under the current 18 percent tax rate, restaurants get to claim on the taxes they pay on various things such as processed food, rent, electricity, and transportation.
However, with GST in effect, most restaurants were claiming the input tax credit from government alongside charging the customer an 18 percent tax on their food bills.
Many were delivering food levied at an 18 percent tax, which apparently prompted the government to reduce GST rate and cut the input tax credit.
“GST at 12 percent without ITC is detrimental for the industry and the consumer. Not only will it increase the cost for restaurant operators, it will also encourage the industry to work with unregistered suppliers. Removal of Input Tax Credit (ITC) will increase the cost for the customer,” said Nitin Saluja, co-founder of tea cafe chain Chaayos.
Started in 2012, Chaayos has raised about USD 7.3 million from Tiger Global and Powai Lake Ventures.
Before GST, restaurants were allowed an input tax credit on things such as food items, cutlery, etc during the ‘VAT cum service tax’ regime.
“The product prices will increase which could lead to a decline in consumption for industry and loss of customers. This will affect whole business and profitability of the business,” said Sagar Daryani, co-founder of Kolkata based Wow Momo, which has operations in most Indian metros.
Started in 2008, Wow Momo raised about USD 8.4 million from investors such as Bandhan Bank, Lightspeed Venture Partners, and Indian Angel Network.
“If ITC is removed my expansion plans for 10 cities will reduce to 5 cities because of more operational costs on us. I request the government to rethink about it as it will impact whole hospitality sector as a whole if the ITC is removed,” said Daryani.
Chaayos recommends leaving the GST and ITC untouched. “If the government wants to make it more affordable for the consumer, then it should be 12 percent with ITC,” says Saluja.
Under GST, taxes have increased on many of these inputs and hence companies claim that disallowing Input Tax Credit will lead to higher operational costs for restaurants, ultimately leading to a rise in the price of final products for consumers.
Under the GST regime, air-conditioned restaurants pay 18 percent GST on food. ITC includes all the professional services of a restaurant such as security, valet parking, electricity bills.
“If ITC is removed from GST it will increase the operating costs of the restaurant by 10 percent. This will be then added to the final payment of the customer’s bill,” says Amlani.
