Impact of GST on Food Services & Restaurant Business

We are all swiftly moving towards a new indirect tax regime — GST. Various businesses are carrying out impact studies and the changes required in their current systems to accommodate the new compliance model. On this note, we bring you our impact analysis on something which is very near and dear to us or rather our stomach–the restaurant and food industry.

Here we will try to explain how the restaurant bill will look under GST & what are its implications for the end consumers, the owners & the overall industry.

According to the National Restaurant Association of India’s 2013 India Food Service Report, the current size of the Indian food service industry is ₹2,47,680 crore and is projected to grow to ₹4,08,040 crore by 2018 at the rate of 11%. This growth is further fueled by the growth of the great Indian middle class. Rapid urbanization, growing awareness of western lifestyles, more women joining the workforce, and higher disposable income were some of the factors that contributed to the growth of the restaurant industry. As a result we find ourself waiting in queues in most of the restaurants during the weekend.

All these figures look promising. However, as an end consumer we hardly pay attention to our food bill in these restaurants and most of us are not even aware about the components included in it.

Impact on End Consumers

Today if you revisit your food bill from last week’s fine-dine experience, you’ll find Service Tax, Service Charge, VAT being added over and above the food value. Under the GST regime service Tax and VAT amount will be subsumed into one single rate, but you may still find service charge doing rounds in your food bill.

Below we have provided a high level comparison of how your food bill looks today as compared to how it’ll look in the GST regime:

So assuming a standard rate of 18% under GST, which is most likely, a consumer will save around Rs. 55 on a transaction value of Rs. 2,200. Here we have assumed that VAT is applicable at 100% of the value without any abatement, this may differ in certain states on the basis of the judgement of high court. Furthermore, if we see the effective rate of tax under current regime, it sums up to around 20.5% which will come down to 18%.

Impact on Restaurant Business Owners

Similarly, restaurant owners have more reason to cheer in the upcoming regime. Under the current tax regime, restaurant business owners do not get any option to adjust the output service tax liability with the credit of input VAT on goods consumed. However, under the new regime both these taxes will get subsumed into GST and thus irrespective of goods and services, credit of input will be available for adjustment against the output liability. This will further optimize the working capital of these restaurants and consumers can expect more superior quality of food and services.

Now assuming that a restaurant owner has purchased inputs worth ₹1,500, in the above example, the total amount payable to the tax authorities under the current regime sums up to ₹233.50. However, under GST, net outflow from the pocket will be ₹126, thus his working capital will be enhanced to the extent of ₹107.50, an illustrative figure.

Thus we can fairly conclude that GST will bring reasons to rejoice for both consumers and restaurant owners under the new regime and we will have more reason to explore the new food joints in our neighbourhood and pamper our taste buds.