GST impact on Restaurants and Food bills – A relief or a pain point

Based on the revision of GST rate for restaurants to 5% on 11th November 2017

1. Previous tax was 18 % with input credit of roughly 3 to 5 percent which is paid to the vendors based on the purchases/ rentals. Let’s us average it to 4% for understanding .

2. So let us say on a bill of Rs100, earlier the tax collected was 18 Rs and payable tax being 18–4 (14 Rs tax paid to government directly and 4 Rs indirectly to the vendors ).Net price is Rs 118.

3. The new tax is straightaway 5% without input credit and the 5% paid to Government plus 4 % which is indirectly paid to vendors on purchases.

4. This adds up to 9%.So there is a benefit to the restuarants of 9 %, if the net price is the same as before, that is Rs 118.

5. Under such scenario, Restaurants will do one of the following:

A.Restaurants may increase menu prices to match the same net price Rs 118 in which case they get that additional benefit of 9%. — LIKELY

B.Restaurants can keep the menu prices same ,which means a benefit of 13 % to the customer and an additional tax burden of 4% to the business (since input credit is discontinued ) — UNLIKELY

C. Restaurants may work something midway where a part of the benefit is to them and part to the customer.-VERY LIKELY

We are likely to see all three happening and it is practically not feasible for the government to monitor the pricing in the business and restaurants will do what they feel is appropriate for their business. There is an anti- profiteering law with GST, where the benefit if any of the tax reduction is to be passed on to the customer but very difficult to gauge and implement where both product and service together are involved.

But reduction to 5% is definitely a positive step for the business on the whole.

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