It was not only a high tax rate on eating out, but the elevated levels of input tax credit (ITC) being claimed by bigger restaurants that spurred the cut in the GST rate on restaurants alongside the abolition of the ITC by the GST Council last week.
As per the internal estimates reviewed by the ministerial panel to revisit tax structure on eateries, big restaurants were claiming about 6-7 per cent of the GST rate as ITC, with the highest claim being against the overhead of rent, three officials close to the development said.
“Restaurants were getting input tax credit benefit for over four months but they did not pass on the benefits to consumers by reducing prices by even a single penny. Big restaurants were claiming ITC as much as 6-7 per cent. A 5 per cent GST rate with no ITC benefits would mean that now that route is closed and they just need to pass on the GST paid by consumers to the government,” one of the officials cited above said.
The decision by the GST Council’s decision to abolish ITC and cut tax rate to 5 per cent has also sparked divergent reactions by high rent paying big restaurants and smaller restaurants. While big restaurants, typically in high rent paying marketplaces, have said that this would lead to increase in prices, smaller restaurants have welcomed the cut in rates, denying a rise in prices.
“We welcome the reduction in GST slab from a very high 18 per cent in an AC restaurant to 5 per cent without any distinction of the air-conditioning…denying the ITC benefit goes against the very grain of GST and will push up the costs by 10 per cent which will be passed on the menu price. So, effectively the consumer pocket will get a marginal benefit and not as it seems,” Rahul Singh, vice-president, National Restaurant Association of India (NRAI), said.
On the other hand, President of Indian Hotel and Restaurant Association (AHAR), Adarsh Shetty said: “Restaurants have bled for last four months. Business went down by 30 per cent especially for home delivery and parcel services. There was no need for a distinction between AC and non-AC restaurants. Prices cannot go up at all after the reduction in rates. Our first priority now is to get business back on track.”
The matter of high ITC claims by restaurants and no commensurate reduction in prices was discussed in the GST Council meeting held on Friday, the officials said. As part of the discussions, it was also felt that keeping GST rate at 12 per cent, as was being demanded by most big restaurants, would lead to a lower effective tax rate with high ITC claims, but was unlikely to result in lower prices for consumers.
Also, the revenue loss to government by keeping GST rate at 12 per cent with ITC benefit and 5 per cent with no ITC benefit was the same amount of around Rs 4,000 crore, a state finance minister told The Indian Express.
“The intention of the Council was to ensure that benefits get passed on to consumers, which should have been originally ensured by the restaurants in the first place,” another state finance minister said. He, however, admitted that it may be a bit tough for government to keep track of increase in prices by restaurants after the new rate comes into effect but was hopeful that market competition would ensure better pricing.
On Friday, while announcing the reduced GST rate on all restaurants, except those in starred hotels, to 5 per cent, Finance minister Arun Jaitley had said that restaurants were not passing the benefits of input tax credit via reduction in prices to consumers and so, it was an “additional burden” for consumers and was resulting in “unjust enrichment”. “Since they did not pass on the benefit of input tax credit to the consumer, they are not entitled to the benefit themselves,” he had said.
Along with lower GST rate on restaurants, the rate on takeaway was also cut to 5 per cent without input tax credit. GST rate on outdoor catering will continue to be 18 per cent with full input tax credit, while restaurants in hotels with room tariff of Rs 7,500 and above per day will attract 18 per cent GST with full input tax credit.