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Impact of GST on Restaurants, Cafes and Fast-food outlets

Prakash Matre
Prakash Matre at April 01, 2023

GST on Restaurants and Cafes 

You have most likely been rejoicing the arrival of GST, given the months-old build-up around it, but have been equally confused and surprised with an inflated bill when clearly the deal the government struck with you and the rest of the nation was  -  that with GST on fast food in place, eating out would now get cheaper. At least if you are dining at a non-AC, no-liquor serving zone.  But did you know that even a simple act of standing at the counter of your favourite mithai or snack shop could save you a huge tax on fast food margin than say, sitting in the comfort of the restaurant and asking the waiter to serve it at a table inside?

Here we're going to explain the impact of gst on restaurant industry and much more.

So a sweet which would attract a GST of only 5% when had at the counter or outside the shop, can attract tax as high as 18% - if you decide to have it sitting at a table in the restaurant, more so if it is an AC restaurant. The same goes for snacks – if you order one and have it right at the counter, then you pay 12% GST on the item, but will have to shell out an excess on 6% on the same product if you decide to enjoy it sitting inside.

Now apply that to fast-food outlets and to having a simple cup of tea as well. If you ended up having that cup of chai sitting in an AC restaurant, you pay a humongous 18% tax which GST on cafe food and GST on coffee shop (GST on tea and coffee in hotel); if you want save money on this, you know what to do – you can have the tea outside and get away with paying just 12% for the beverage experience.

Needless to say, this has been extremely confusing for both consumers and business-owners who have not yet grasped the nuances of the GST system yet. Business-owners in fact, have gone on to interpret GST rates differently, in a ‘to-each-his-own’ manner, where for example, some sweet shops continue to charge 5% on sweets had at tables, on the premise that “only establishments with a large seating area are eligible to impose higher taxes and they do not have one.”

With so much misperception surrounding GST on fast food restaurants and fast food cafe GST rate on fast food items levied on restaurants and fast-food outlets, businesses continue to experiment with tax slabs, while the diner mostly gets taken aback with inflated food bills presented to him wondering what the differential tax rate is all about.

Much has been discussed regarding the impact of GST on food industry, which, finds application here as well. However, to gain more clarity on the present subject, it would be prudent to take this particular segment of the economy apart and see how it will fare against the backdrop of GST.

After GST, Where Lies the Fate of Dining Out?

We all know that GST has come up as a saviour in the face of as many as 17 indirect taxes and promises to address taxpayers’ woes by introducing a unified and simplified tax regime in place of the erstwhile complicated, layered tax mechanism.

But did you know that your restaurant bill itself had a pile of taxes before, the list being – VAT, Service tax, Krishi Kalyan Cess and the Swacchh Bharat Cess? This amounted to a whopping 18.5 -20.5% overall tax (depending on the states) on the restaurant bill, which meant consumers had no respite from either the government or the restaurant owners who would slip in additional charges such as service charge, as well as the tax levied on it. This charge is of course, voluntary and can be paid at the discretion of the diner, but has in the past routinely been paid by unaware consumers who believed it to be a governmental imposition.

Under the new GST regime though, the rules are different as the tax slabs have been decided primarily on the basis of two broad categories i.e. air-conditioned and non-air-conditioned restaurants, bringing in a few other sub-categories.

Establishment Type and Services GST Rate Applicable
At establishments with turnover of <INR 75 lakh 5% (Composition Scheme) without ITC
Non-AC restaurants not serving alcohol 12% with ITC
Non-AC restaurants serving alcohol 18% with ITC
Restaurants with AC or Central heating (whether serving or not serving alcohol) 18% with ITC
Partly AC and partly non-AC restaurants (includes those serving and those not serving alcohol) 18% with ITC
AC Restaurants inside 5-Star Hotels 18% with ITC

This effectively means that non-AC (non-alcohol serving) roadside eateries (this includes your local delivery restaurants as well) will now charge tax at 12%, while those serving (whether AC or non-AC) alcohol will charge 18%. This includes cafes and fast-food joints as well, where the previously discussed tax slab of 12 or 18% would apply, if you happen to seat yourself at a table and order food, irrespective of whether you plan to have it there or treat it as a takeaway. Pre-packed and pre-cooked food on the other hand, would attract a tax rate of 12%.

Interestingly, potable alcohol has not been included in the ambit of GST, which means consumers will have to pay for it as per the earlier tax regime (only the VAT will remain, not the service tax).

The fast food GST rate that will now be levied will also include the service charge, which was a component that used to drastically inflate food bills previously with restaurants whimsically lumping a service charge of approximately 10% and levying service tax on that as well. With this subsumed in the current tax regime, consumers are likely to find some measure of relief as the overall bills come down. The biggest bonuses of the present tax structure, of course, lie in doing away with service tax and VAT for food items, except for alcohol.

Net Consequences of This Move

To be honest, it is an interesting mixture of tangible results to be seen and felt in the coming months (some of which is already playing out in the industry):

Industry stakeholders i.e. the restaurant and fast-food joint owners stand to gain the most in this scenario as it now becomes possible to claim input tax credit (ITC) on the on goods and services consumed while providing services. More has been elaborated about this effect here. In place of multiple governmental and restaurant-imposed taxes, lies a unified tax form that is simply split as CGST (tax that goes to the Centre) and SGST (tax that goes to the State), so this makes it simple for both businesses and consumers, both in terms of calculation and comprehension, respectively.

There however, remains a lot of be understood in the context of taxing diners. For one, service charge still makes its way in with some of the food bills and consumers are perplexed as to why all the taxes are not falling under a single head as was promised. Some restaurants continue to levy service charge as part of their “management policy” rendering it a mandatory touch, while others have desisted from levying the same on various grounds – one reason being GST exemption applicable on certain ingredients like food grains, fresh fish, chicken and mutton, etc. For those who continue to impose the charge on the customers, fresh clarity has come about in the sense that only recently, Food and Consumer Affairs Minister Shri Ram Vilas Paswan echoed that service charges in restaurants were by no means voluntary, and were purely discretionary, to be decided by the consumer. This comes about as a slight respite to customers who can file a consumer complaint against this sort of unfair trade practice in the relevant forum if they find service charge mandatorily charged on their food bills.

To make it easier for customers to understand and businesses to maintain transparency, recently, the government issued guidelines in this regard, where it has been categorically stated that product prices (in this case the menu card in restaurants and cafes) should cover both the goods and service components, since ideally, the customer agrees to pay prices that appear on the menu and relevant applicable taxes only, not any other charge over and above that. To delineate this discretionary feature of potential food bills, restaurants may now specify that service charge is voluntary and leave a column blank for the customer to fill in before making any payment. This way, restaurant and café owners are compelled to follow the law and not overcharge customers in the name of “governmental taxes” whereas customers are saved from being repeatedly swindled.

Whether or not this will bear the desired fruits is yet to be seen, nevertheless, it is a safeguard against haphazard and whimsical pricing structures followed by most businesses in the food and dining business.

Logically speaking, the first point of the aforementioned guidelines is in tune with the concept of input tax credit (that can now be claimed), which is more likely to reduce overall prices in the long run, benefiting both businesses and consumers. So ideally, there remains no reason why consumers should be overburdened now, when in fact, they should be receiving the benefits passed on from the taxes saved by businesses in the food industry.

In this context, it may be said that a lot of transparency has come about in how food bills shall now be calculated. So, if a restaurant owner thinks can restaurant charge gst from customers, now you got the answer from the above statement.

That said, many restaurants immediately hiked their prices with effect to the GST roll-out, knowing fully well that prices would likely come down. In these cases, consumers obviously ended up paying just as much. Whereas there are also many others, who are waiting to see the full effects of the new tax regime and get a balanced picture of their costs and benefits, before hiking/stabilising prices. Quite naturally, the current economic scenario against the GST backdrop seems to be undergoing a massive transition phase, one that will take considerable time and consistent effort on the part of industry stakeholders, to be leveled out where everybody wins a piece of the GST slice. To be blunt, a lot in this industry depends on the wait-and-watch policy; as of now GST compliance and an understanding of all its subtle nuances is paramount and the only way forward to adapting to the new tax structure seamlessly.


Impact of GST on Restaurant Business Owners

The restaurant owners are a happier bunch in the GST era, as compared with the earlier module of the VAT regime, which did not allow to adjust the output service tax liability against the credit of input VAT on goods consumed. With GST subsuming, both of these taxes, the restaurant genre can now claim the credit of input for adjusting against the output liability, ultimately strengthening their bottom line.

Particulars Billing under previous regime Billing under GST Regime
Wheat 2000 2000
Spices 600 600
Oil 400 400
Total 3000 3000
VAT @5% (Items generally under 5%) 150  
GST @5%   150

To conclude, restaurants, cafes and fast-food outlets would need to stabilize prices in order to maintain the footfalls and keep business thriving, while customers may need to frequently calculate the ramifications of how much they would be shelling out depending on the ‘where’ of this scenario. Giving up on a little bit of comfort can help you save an excess of 7-13% on something as harmless as a mithai, dhokla or some other snack item. But the good news is you would be spared considerable decision fatigue on choosing between sitting indoors and outdoors at an AC restaurant since you will be taxed just the same, no matter where you sit and dine. You can continue to getting hung over as much as you like, with alcohol prices reduced by almost 6 percent. Just that binging on pure chocolate items and ordering in from your favourite fast-food outlet will prove costlier, attracting anything from 12-18% on your bill, a pocket pinch you certainly did not have to face earlier.

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