The launch of the GST in India has presented a challenge for the restaurant industry. Changes made under the GST council have left many restaurant owners reeling. In many cases, eateries are adjusting their operations to stay profitable and continue expansion.
The History of GST for Restaurants
When the GST regime first launched, it set different tax rates based on restaurant type. In the beginning, restaurants with air conditioning paid a GST of 18%. If your restaurant did not have AC, you paid a GST of 12%. Restaurants in five-star hotels were taxed at 18%. Initially, all restaurants could claim the input tax credit (ITC). This allowed restaurants to subtract the GST paid on supplies from their tax liability.
In November 2017, GST council made a decision that impacted most of the restaurants in India. It decided to drop the GST rate for restaurants to 5%, regardless of whether they have AC. The only exception being a restaurant in a hotel that has a declared room rate of INR 7500 or higher. In which case you’d pay 18% GST. What’s more? The council took away the ITC from restaurants in the 5% bracket. But left it for restaurants that qualify for the 18% rate.
What Is the Impact of Removing the ITC?
The decision to remove the ITC caused problems in the industry. The GST council blamed its choice on restaurants. It said that restaurant owners did not pass credit savings to their customers by lowering prices. If you’re a restaurant owner, you may not agree. After all, the ITC is only one part of the regime that affects your tax bill.
GST increased the tax rate of many supplies you buy for your restaurant, including aerated drinks, coffee and spices. Without the ITC, you’re simply forced to pay higher prices for those items. With no possibility of a credit. Many restaurant owners used this reasoning to defend why they did not reduce prices when the ITC is active.
The lack of ITC for restaurants also prevents owners from expanding as fast as they’d like. Opening a new restaurant requires a great deal of expensive supplies. And without the benefit of the ITC, you’d need to have a higher cash flow for this process. This can be difficult for small business owners. As a result, some owners report having to delay expansion plans while they build capital.
Outlook for the Restaurant Industry Under GST
Despite the hiccups with the GST regime, restaurants across India are starting to settle in to the new system. In fact, many restaurant owners feel that the GST has largely had a positive impact. Taxes are lower and the regime has dropped prices on many other goods and services. Therefore, leaving consumers with more disposable income that can be used on things like dining out. Combined with the country’s rapidly growing middle class, GST bodes well for restaurants as a whole.
Although the GST means that you may need to rethink your restaurant’s growth plans, the overall outlook is positive. As the industry settles in to the regime, experts hope that the expanding economy can help you stay profitable well into the future.