Everything Restaurant Owners Need To Know About GST

The revolutionary indirect tax in India i.e. GST (Goods & Services Tax) rolled out last week on the 1st of July, replacing a cascading system of taxes. It is set to change the face of Indian Economy. The motive behind the implementation of GST was to make the tax structure simple and administration easy. It will also help reduce the overall effective tax rate charged on many goods and services.

How is it going to affect the overall restaurant industry is a question popping in most of the restaurateur’s heads.

The Indian Restaurant industry is fragmented with 1.5 million eating outlets. As per NRAI’s India Food Services Report 2016, the total food services market today stands at INR 3, 09, 110 crores and has grown at 7.7 % since the last report in 2013. This is projected to grow to INR 4, 98, 130 crores at a CAGR of 10% by 2021. In 2016 alone, the Indian restaurant sector created direct employment for 5.8 million people and contributed a whopping INR 22, 400 crores by way of taxes to the Indian economy. When it comes to the restaurant industry, the tax is progressive – it’s likely to benefit the small restaurants and dhabas, but hamper 5-star restaurants and hotels. 

TAX RATES:

FOOD:

The effective tax for the food served in restaurants was around 20.5% before GST.

The GST Council has fixed multiple rates on restaurants based on different variables like turnovers, air-conditioned or not and other factors.

• SMALL RESTAURANTS: Restaurants with a turnover <Rs. 50 Lakh are placed in the tax bracket of 5 percent – these include street food vendors, neighboring eateries, local market stores and dhabas.
• MEDIUM RESTAURANTS:
  • Restaurants with a turnover > Rs. 50 lakh without ACs are taxed at 12 percent.
  • Restaurants with a turnover of Rs. 50 Lakh+ AC facilities to the customers will pay 18 percent tax.
• LUXURY RESTAURANTS: The tax slab increases to 28 percent for luxury restaurants ( five-star and seven-star hotels ).
  
  

ALCOHOL AND AERATED DRINKS:

• For alcohol, states don’t want to lose the significant revenue currently earned from state excise duty. In many states, the revenue from state excise taxes imposed on alcohol brings in 25 percent of total revenue. For this reason, the state excise tax on alcohol has been kept out of the constitutional mandate for levying GST.
• VAT on alcohol will be added as per the state figures.
• Many restaurants and bars are still charging the old tax rate on the total alcohol bill. They are giving the same bill for food and alcohol with two different tax rates calculated i.e. GST and VAT respectively.
• Aerated drinks come under the highest tax bracket of 28%, as they fall under the ambit of luxury goods.
  
  

CAPITAL SIDE:

PROCUREMENT OF WORKING CAPITAL:

• Something to cheer about:  Under the current tax regime, restaurants do not get any option to adjust the output service tax liability with the credit of input VAT. However, now both these taxes will get merged into one tax – GST. Irrespective of goods and services, the credit of input will be available for adjustment against the output liability. This will optimize the working capital of restaurant owners.
• Something to be sad about:  Under the VAT regime, composition holders were not liable to pay purchase tax on purchases made from unregistered persons. Under GST laws, the restaurant owner shall be liable to pay tax on supplies from unregistered persons at full rate.
• Raw materials can be procured at subsidized rates from agriculturists and farmers at a single stroke. Owners will not have to negotiate – taxes shall remain uniform throughout states thus making the competition even. The overall cost of procuring goods will thus decrease substantially.
• For many restaurants, procuring domestic inputs have become cheaper with the tax charged at 18% while imported inputs are charged at 28% and have become relatively more expensive.
  
  
  
  

PROCUREMENT OF FIXED CAPITAL:

• Something to cheer about: The supplier of restaurant services will be entitled to input tax rebate on the inputs, capital goods and input services used by them in the course or expansion of the business.
• Something to be sad about: Up until now, the Capital Goods were procured at a VAT of 14.5%. The GST is levied at 18%, leading to a rise in costs.
• There is still ambiguity in the case of Purchase Orders that were sent out before the GST rolled out and the capital being delivered in the aftermath. The restaurant owners are still confused as to which rate will apply – the VAT or the GST. The accounting of taxes for the gestation period is still ambiguous and many restaurants are yet to face the GST implications. Some of the vendors have also put the orders on hold until this doubt is cleared. 
• Capital expenditure (investing in capital for the business) could rise because of an increase in the procuring cost of capital goods.
  
  
  
  

ONLINE DELIVERY STARTUPS:

The growth in the organized food services industry and new age food booking and delivery startups (Swiggy, Tiny Owl, Foodpanda, Zomato and the like) would contribute significantly to the revenues of the country.

However, currently, E-commerce companies will not be required to collect one percent TCS (Tax Collected At Source) while making payment to suppliers under the GST regime. Small businesses ( those with turnover less than Rs 20 lakh ) will also not be required to register themselves under the GST for selling goods or services through an e-commerce portal. This step has been taken to provide more time for persons liable to deduct tax at source/e-commerce companies and their suppliers to prepare for the historic tax reform.

Nonetheless, with a single unified tax rate, restaurant owners are already taking a sigh of relief as lower taxes are attracting more consumers as they have benefitted by 6-8% from their previous restaurant bills. 

COMPOSITION SCHEME UNDER GST:

Restaurant sector may opt for this scheme only if their annual turnover is < Rs. 75 Lakhs. A registered taxpayer in the restaurant sector, who is registered under the Composite Scheme will pay tax at a rate of 2.5% each for CGST AND SGST respectively.  A composition dealer is not allowed to avail input tax credit of GST paid to their supplier.

For detailed information regarding this, you can read this article – Cleartax

HOW TO SHIFT TO THE GST FRAMEWORK ONLINE:

Any individual or entity that fulfills any of the following conditions need to get GST Registration:

1. Having an annual aggregate turnover from operations in the state more than 20 Lakh (Rs. 10 Lakh for the North-Eastern States).
2. Currently registered under any of the existing indirect tax regimes (VAT, Excise Laws, Service Tax Laws) irrespective of the threshold limit.
3. Having operations in multiple states.
4. Required to pay tax under Reverse Charge.
5. Supplying goods or services through E-commerce Operator.

Businesses are required to shift from a service tax framework to a GST one through a registration process. This service is also available online provided you have all the documents in hand.

• Go to aces.gov.in to log in to your service tax portal with the Registered ID and Password.
• Click on the option to obtain provisional ID for GSTN. The provisional ID and password will appear on the screen.
• Further, go to gst.gov.in and click on New User Login.
• Fill PAN, Mobile No., E-mail ID and State in Part-A of Form GST REG-01 of GST Registration.
• You will receive a temporary reference number on your Mobile and via Email after OTP verification.
• Click on “I Agree” button and “Continue” tab to proceed from the terms and conditions page. A list of documents with max MB size of each is displayed on the screen.
• You will then need to fill Part-B of Form GST REG-01 duly signed (by DSC or EVC) and upload the required documents specified according to the business type.
• You will receive acknowledgment in Form GST REG-02.
• In case of any information sought from you in Form GST REG-03, you may need to visit the department and clarify or produce the documents within 7 working days in Form GST REG-04.
• The office may also reject your application if they find any errors. This information will be in Form GST REG-05.
• Finally, a certificate of registration in Form GST REG-06 will be issued to you by the department after verification and approval.

A private limited company requires the following documents:

1. Incorporation certificate and constitution documents
2. PAN
3. Board resolution for signatories
4. Bank statement
5. Declaration to comply with GST norms
6. PAN and ID proof of directors
7. Address proof of registered office.
   
   
   

Points to note

* A person with multiple business verticals should have multiple registrations under GSTN for each business.

* PAN is mandatory for GST registration.