Understanding GST on Food Services & Restaurant Business in India

As we all know that businesses are still attempting to grasp the changes needed in their current systems due to day to day changes in GST. The applicability of GST on food industry, services, and food items or products has put an end to all the cascading effects of several indirect taxes. In this blog, we have discussed in detail about the GST rates applicable to different food items, together with the applicability of the GST rate on food services. Moreover, we have also talked about the impact of GST on customers and how they are enjoying the reduction in bill amount after its implementation.

Brief overview of Food and Restaurant Business Industry in India

According to the National Restaurant Association of India’s 2019 India Food Service Report, the size of the Indian food service industry was 1,48,353 crores in 2018-19 and is projected to grow to Rs 2,57,907 crore in 2022-2023 with a CAGR of 15%.

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 ourselves waiting in queues in most of the restaurants during the weekend.

Restaurant Bill before implementation of GST

As a final customer, we have a tendency to hardly pay attention to our food bill in these restaurants and most of us are not even aware of the tax components included in it. If you revisit the restaurant then you will realize Service Tax, Service Charge, and VAT being added over and above the food worth. The food bill includes the following taxes:

• VAT (Value Added Tax): It is the tax charged on the food portion of your bill.
• Service tax: It is the tax charged on the services i.e. provided by the restaurant. [Government had already divided the service portion and food portion and charge taxes to avoid unnecessary confusion consequently.]
• Service Charge: It’s a charge applied by the restaurants and not by the government. This is not a tax. It shouldn’t be misunderstood with service tax as financial gain to the hotels. Service tax is not an income to the hotels and simply a tax collected from the customers and provided to the government.

Introduction of GST Rules for food and Restaurant Business

When the GST was first launched in July 2017, restaurants could fall into three different rate slabs.

• If the restaurant did not have air conditioning, the GST charged was 12%.
• For a restaurant with AC or a liquor license, 18% GST was applicable.
• For restaurants within five-star hotels, the GST rate was set at 28% and at that time, all Indian restaurants in India could take advantage of the input tax credit.

This implies that when you paid GST while buying supplies for your restaurant, you could subtract that amount from your tax bill. That helped reduce costs for many restaurants.

Impact of GST on Restaurants Business and Their Services

The GST system has a made an impact in the restaurant business.  It brought a positive impact on the small restaurants, QSRs but it has hampered the 5-star hotels and restaurants. Non AC restaurants charge a 12% GST and AC restaurants charge 18%. A five-star restaurant and hotels charge 28% GST. But restaurants which have a turnover of less than Rs. 50 lakhs are levied with 5% GST. Bakeries are the type of food business that has most profited from the current GST system. They charge a levy of 39% which previously was 26.5%.

GST Rates on Restaurants (with effect from 01.10.2019):

• *This includes people supplying catering or alternative services in hotels (having room tariff of Rs 7,500 or more) but not hotel accommodation services.
• Under GST, the Service Tax and VAT amount will be subsumed into one single rate, however you may still realize service charge doing rounds on your food bill.
• Below we’ve given a comparison between pre and post GST regime scenario for food bill under which a customer can save around Rs. 75 on a transaction value of Rs. 3000.

In the VAT, effective rate of tax is 20.5% which will come down to 18% in GST.

Comparison of Billing under VAT and GST Regime

Now within the above instance, the total amount payable to the tax authorities within the GST sums up to ₹1900. However, under GST, net outflow from the pocket will be ₹500, thanks to the reduced tax rates, thus his working capital will be increased. Thus, GST bring reasons to rejoice for each customers and restaurant owners under the GST. Further, we can have additional reason to explore the new food joints in our neighborhood and handle our taste buds.

Closing words

Overall we can say is, that the new GST system has brought a positive impact for few sectors of food businesses like small restaurants and QSRs but has hindered the five start hotel businesses. The new components of the GST are CGST; Central Goods and Service Tax, SGST; State Goods and Service Tax, IGST; Integrated Goods and Service Tax. Also introduction of the new GST system has eliminated the previous dual taxation system.

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