GST on Restaurants: Understanding the Tax Structure and Its Impact
CA Navin Singhal
CA Navin Singhal is a versatile professional with diverse experience in various fields, including:
– Valuation expertise in Insolvency and Bankruptcy cases as a junior valuer
– Statutory audit of listed and unlisted companies
– Stock and receivable audit
– Leadership role in internal audit teams
– GST audit for individuals and companies
His broad range of experience has equipped him with a unique understanding of various aspects of accounting, auditing, and valuation.”
GST on Restaurants: Understanding the Tax Structure and Its Impact
Introduction
The Goods and Services Tax (GST) is an indirect tax transforming India’s taxation system. One of the most significant areas affected by GST is the restaurant industry. Before the introduction of GST, multiple taxes, such as Service Tax, Value Added Tax (VAT), and Central Excise Duty, were levied on food and beverages. However, GST has streamlined taxation by unifying these taxes under a single system. This article provides a comprehensive overview of GST on restaurants, including applicable rates, exemptions, and its overall impact on the industry.
GST Rates for Restaurants
The GST rates applicable to restaurants depend on various factors, including the type of establishment and the availability of an input tax credit (ITC) facility. The government has classified restaurants into different categories to apply specific GST rates.
Standalone Restaurants
Restaurants that operate independently and are not part of a larger chain are taxed at 5% GST without an input tax credit. This means they cannot claim credit for the GST paid on raw materials and services essential for restaurant operations.
Restaurants in Hotels
Restaurants located within hotels that charge a per-night room tariff of ₹7,500 or more attract 18% GST with input tax credit. However, if the room tariff is below ₹7,500, the restaurant is taxed at 5% GST without ITC.
Outdoor Catering Services
For catering services provided outside restaurants, the GST rate is 5% without ITC if not associated with a hotel. However, if the catering is linked to a hotel with room tariffs above ₹7,500 per night, 18% GST with ITC applies.
Food Delivery via E-Commerce Platforms
Since January 1, 2022, online food aggregators like Zomato and Swiggy have been responsible for collecting 5% GST on behalf of restaurants. This change was introduced to prevent tax evasion by small eateries and ensure proper tax collection.
Input Tax Credit (ITC) and Its Restrictions
Restaurants under the 5% GST slab cannot avail themselves of the Input Tax Credit (ITC). ITC allows businesses to offset the GST paid on purchases against the GST collected on sales. To simplify compliance, the government removed ITC benefits for most restaurants.
On the other hand, restaurants and catering services taxed at 18% GST can claim ITC, allowing them to reduce their overall tax burden by claiming credit on input goods and services.
Composition Scheme for Small Restaurants
The Composition Scheme under GST is an option available to small businesses, including restaurants, to reduce compliance burdens. Restaurants with an annual turnover of up to ₹1.5 crore can opt for this scheme and pay GST at a lower rate of 5% on turnover, but they cannot collect GST from customers or claim ITC.
Exemptions Under GST
Certain categories of food services and products are exempt from GST or taxed at lower rates:
- Unprocessed food items, fresh fruits, fresh vegetables, and dairy products are exempt from GST.
- Small roadside food vendors and dhabas with annual revenue below the GST threshold limit of ₹20 lakh (₹10 lakh for special category states) are not required to register for GST.
- Prasad, langar (food served in community kitchens), and meals provided by religious institutions are also exempt from GST.
Impact of GST on the Restaurant Industry
Simplified Taxation
Before GST, restaurants had to navigate multiple indirect taxes like VAT, Service Tax, and Excise Duty, which resulted in complexity and higher compliance costs. GST has simplified this structure by introducing a unified tax.
Pricing Transparency
Earlier, customers were confused by the separate taxes mentioned on restaurant bills. GST ensures a transparent pricing mechanism, as only a single tax rate is applied.
Increased Cost for High-End Restaurants
While the 5% GST without ITC benefits small and medium-sized restaurants, high-end restaurants with a higher GST rate of 18% (with ITC) may experience increased operational costs. However, they can still offset some of these costs through ITC.
Burden on Online Food Aggregators
With the introduction of mandatory GST collection by food delivery platforms, compliance requirements for these platforms have increased. Restaurants that sell through online aggregators must also ensure proper tax documentation.
Conclusion
GST has played a pivotal role in reshaping the tax structure of the restaurant industry in India. While it has eliminated complexities associated with multiple taxes, the restriction on Input Tax Credit for small restaurants presents both benefits and drawbacks. The industry has largely adapted to these changes, and with further refinements, GST could continue to streamline taxation while ensuring fair compliance and growth. Consumers now benefit from increased pricing transparency, while restaurant owners operate under a more structured tax regime. However, businesses should stay informed about regulatory changes to ensure compliance with GST laws.
Disclaimer
The content published on this blog is for informational purposes only. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. We make no warranties
