GST on Food Business Industry

As an end consumer, we hardly pay attention to our food bill in these restaurants and most of us are not even aware of the components included in it. If you revisit your food bill from the pre-GST fine-dine experience, you’ll find Service Tax, Service Charge, VAT being added over and above the food value. 

First, let us understand the components of the bill:

• VAT: This is the tax charged on the food portion of your bill.
• Service tax: This is the tax charged on the services provided by the restaurant. [To avoid unnecessary complications, the government had already bifurcated the service portion and food portion and charged taxes accordingly.]
• Service Charge: This is a charge applied by the restaurants and not by the government. THIS IS NOT A TAX. It should not be confused with service tax as this is an income to the hotels. Service tax is not an income and merely a tax collected from you and submitted to the government.

However, the rates under GST are vastly different from what you would find before the tax policy change. Let us look at these changed rules.

Under GST, restaurants fall under the 5% GST rate, with no option to claim input tax credit (ITC) or the 18% GST rate, with ITC claims. This rate is decided depending on the location of the restaurant. For instance, a higher GST rate would be applicable for restaurants located within hotels where the room tariff exceeds the specified amount.

In the tables below, we decode the GST rates applicable on food, catering, and restaurant services.

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 levelled 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.