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Expansion 27 Oct 2017

Why Reduction in GST for Restaurant will make Eating Out Expensive

By Nusra Sub Editor

Today when restaurant and food business is going through the tough time, commending the Goods and Service Tax which is a revolutionary tax reform, and not rolling out GST in a holistic manner, despite the challenges and scepticism from various quarters will highly impact the sector.

Under the GST regime implemented on July 1, 2017, air-conditioned restaurants pay 18% GST on food. The best part about the GST scheme is complete pass- through of taxes via Input Tax Credit (ITC). ITC works in a way that all vendors and suppliers who may have earlier been in the unorganised sector are incentivised to come under the organised sector and file tax returns. As a result, all participants in the food supply chain as well as restaurants pay taxes at reasonable rates.

As per recent media reports, the Government is likely to bring down GST to 12% from 18% - which is a welcome move. However the concern is that without Input Tax Credit, such a move could actually increase the final price that consumers pay for food!

““Under the earlier tax regime, the tax on processed food was at 5%, but now under GST, this has gone up to 12%. Taxes on many such inputs have gone up, so if we do not get an input tax credit,  then our cost of running the restaurants will go up, leading to higher menu prices for customers”, shared Riyaaz Amlani, President of the National Restaurant Association of India.

This is because under the current 18% tax rate, restaurants get to claim credits on the taxes they pay on various things like processed food, rent, electricity and transportation. However, if the GST rate is brought down to 12%, then in the absence of input tax credit, they will not able to claim these tax rebates, resulting in an increasing in their operational costs by 7% -10%. In fact, even in the earlier tax regime, restaurants were allowed an Input Tax Credit on things like food items, cutlery etc.

NRAI would like to draw the attention to the fact that under GST, the taxes have increased on many of these inputs and hence disallowing Input Tax Credit will only lead to higher operational costs for restaurants, ultimately leading to a rise in price of final products for consumers!

The core of GST is the implementation of ITC, which removes tax on tax (popularly known as cascading of taxes). This undesirable tax cascade, impacting the common man, has been the bane of older tax systems prevalent before the recently implemented Goods and Service Tax. If GST is brought down to 12% without continuing to permit ITC, it would severely undermine the spirit and intent of GST and be akin to going two steps behind the archaic tax that previously existed.

This move could also be very confusing for customers as prices of goods will go up despite a fall in tax rates!

Higher prices could result in reduced food off take; ultimately impacting the agricultural sector as well. We do hope that the proposal is not implemented in its current form, and that industry’s views are taken into consideration, keeping the benefit to end-consumers paramount.

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