Navigating GST In The Food And Restaurant Industry: What You Need To Know

The implementation of the Goods and Services Tax (GST) in July 2017 brought a significant shift in the taxation landscape for the Indian food and restaurant industry. GST was introduced as a comprehensive indirect tax on the manufacture, sale, and consumption of goods and services across India, replacing multiple overlapping taxes levied by the central and state governments.

GST Rates on Food Items

GST on food items and services can vary widely, with rates set at 5%, 12%, or 18% depending on several factors including the type of establishment and the location of the restaurant or food service provider. This tiered system was designed to accommodate the diverse nature of the food service sector, from small eateries to luxury restaurants. The primary objective behind these rates is to make the tax system more equitable and to simplify the tax structure for businesses and consumers alike.

For most basic food items that are consumed by the common man, GST rates range from nil to 18%. Essential items, especially fresh foods like vegetables, fruits, and meat, are generally exempt from GST to ensure that the basic cost of living is not adversely affected by the new tax regime. On the other hand, packaged foods bearing a registered trademark are subjected to GST, reflecting the tax's aim to levy higher rates on luxury or non-essential goods.

GST rates on Food, Beverage Services, and Accommodation

 Note: Then rates given in the list are subject to periodic change

GST on Food items

Service Charge vs. GST

A point of confusion for many consumers is the distinction between service charges and GST. While GST is a government-imposed tax, service charges are collected by the restaurant for the services provided. It's important to note that service charges are entirely separate from GST and are levied at the discretion of the restaurant. This means that a consumer's bill will often include both GST and a service charge, reflecting both the tax on the food and services consumed and the restaurant's own charges for providing those services.

Restaurants serving alcoholic beverages are subject to additional complexity in their tax structure. Alcoholic drinks are exempt from GST but are taxed under the Value Added Tax (VAT), which is a state-level tax. This results in a dual tax system for establishments that serve both food (subject to GST) and alcoholic beverages (subject to VAT), further complicating the billing process for customers and the tax compliance process for businesses.

The introduction of GST aimed to streamline the taxation process, reduce the tax burden on the end consumer, and eliminate the cascading effect of various taxes that were applicable under the previous tax regime. However, the nuanced application of GST rates based on the type of food service establishment and the nature of the items sold means that both consumers and businesses must be well-informed to navigate this system effectively.

Different GST Rate Slabs

1. Non-Air-Conditioned Restaurants: These establishments were placed under a 12% GST slab. This category was designed to offer a slight relief to smaller restaurants or those in regions where air conditioning is not prevalent.
2. Air-Conditioned Restaurants and Those Serving Alcohol: The presence of air conditioning or a liquor license elevated a restaurant to the 18% GST slab. This was seen as a move to tax luxury dining experiences at a higher rate.
3. Five-Star Hotel Restaurants: The highest slab of 28% was reserved for restaurants located within five-star hotels. This rate was indicative of the premium dining experience offered by these establishments.

Input Tax Credit (ITC) Benefit

Initially, all restaurants, regardless of their GST slab, were eligible to claim the Input Tax Credit. This provision allowed them to deduct the GST paid on inputs (like raw materials) from the GST collected on sales, potentially lowering the overall tax burden and prices for consumers.

Step 3: Effect of GST on Restaurant and Food Items

Simplification of Bills

The introduction of GST consolidated multiple taxes into a single tax, simplifying the billing process for customers. Earlier, diners had to navigate through various taxes like VAT, Service Tax, and Krishi Kalyan cess, which made bill comprehension difficult. The unified GST rate made it easier for customers to understand their bills.

Impact on Costs

• For Restaurant Owners: The ability to claim ITC initially suggested that restaurants could reduce their operational costs. However, the removal of ITC for those in the 5% GST slab meant that many establishments could not claim deductions for the GST paid on inputs, affecting their profitability.
• For Customers: While the simplification of taxes was expected to lower dining costs, the actual decrease in prices was marginal. This was partly because the service charge remained unaffected by GST and continued to be levied by restaurants.

Changes in ITC Benefit

Over time, amendments in GST rules have altered the landscape for ITC benefits. Currently, only establishments charging 18% GST on their services can avail of ITC benefits. This has created a distinction between luxury and non-luxury dining in terms of tax benefits, impacting the operational dynamics of restaurants.

Conclusion

The GST on food and restaurants has undergone several changes since its inception, affecting both the operational aspects of restaurants and the dining experience of customers. While the move towards a unified tax system under GST has simplified billing and taxation, the nuances of rate slabs, the applicability of ITC, and the distinction between different types of dining experiences highlight the complexity of implementing a one-size-fits-all taxation policy in a diverse market like India's restaurant industry. As the GST council continues to review and adjust policies, it remains to be seen how these changes will further impact both restaurant owners and patrons.

Meta- The effects of GST on food services, catering, and dining out