Introduction

The Indian Restaurant industry is worth Rs. 75,000 crores and is developing at a yearly rate of 7%. The business is exceptionally divided with 1.5 million eating outlets. As per NRAI’s India Food Services Report 2013 the industry currently employs 4.6 million people directly which is projected to grow to 8 million by 2018 NRAI’s India Food Services Report 2013. Along with other sectors, GST will be applicable from July 1, 2017 to the nation’s F&B (Food and Beverage) industry. GST is going to affect both the suppliers under Restaurant Industry as well as the consumer.

Current Regime

Taxability under VAT

VAT is applicable to the goods like cooked food, cold drink etc. at different rates as per the rate specified by the state.

By taking the example of the State of Madhya Pradesh, we can understand the different rates that is applicable to the different products provided by the restaurants.

  • VAT is leviable @5% on cooked foods and snacks provided by a restaurant.
  • VAT is leviable @20% on Cold drinks and @14% on other non food items.
  • Entry Tax is also payable @1% on raw material and incidental goods used in the manufacture of cooked food.
  • Luxury Tax is also payable by outdoor caterers @10% under LEAT Act with the deduction of sale price on which tax is liable to be paid under MP VAT Act with the exception of Hospitals and Educational Institutions.
  • Tax on sale of alcoholic liquor to customers is levied @ 5% under MP VAT Act.

Service Tax Liability

Service Tax is leviable @ 15% on services provided by Air Conditioned Restaurants with an abatement of 60%. Therefore, effective rate is 6%.

Composition Scheme under MP VAT Act

The dealer whose turnover per annum is upto Rs.1 crore opt for Composition Scheme under MP VAT Act and is liable to pay composition money @3% on the turnover of cooked food manufactured without the facility of input tax rebate. The composite dealers cannot claim input tax rebate.

Restaurant under GST regime

Tax Rates

There are different tax slabs for restaurants depending on their turnover and whether they have air-conditioning or or not.

  • Restaurants with a turnover of less than Rs 50 lakh will be levied a tax rate of 5%;
  • Non-AC restaurants will be charged 12% tax;
  • Tax rate for AC restaurants and those with the liquor license will be 18%;
  • Restaurants in 5-star hotels will attract a GST rate of 28%.

The Tax rate under GST regime will be leviable as supply of services, not as supply of goods on transaction value. Restaurant services have been specified as composite service.

Input Tax Credit is available on the inputs, capital goods and input services used by restaurant service supplier.

Composition Scheme

The registered persons who opt for composition will pay tax @ 5% on aggregate turnover under GST regime without the benefit of Input Tax Credit.

Features

  • Under GST laws, the restaurant owner in the restaurant industry shall be liable to pay tax on supplies from unregistered persons at full rate under reverse charge mechanism (RCM) as the restaurant owners have to make a lot of supplies from unregistered persons. Under the VAT regime, composition holders are not liable to pay purchase tax on purchases made from unregistered persons.
  • Rs. 75 Lakh for composition is too low to get the real benefit. Under VAT laws, restaurants are enjoying higher limits with lower tax rates.
  • Restaurant service providers and hoteliers are in for real hardship under GST regime with higher burden of taxation on outward supplies. There will also be issues with regard to compliance under GST regime where the supplier has to maintain accounts and documentation meticulously to claim Input Tax credit and also comply with the different provisions of the GST laws.

In case you are confused about GST as a business owner, feel free to consult the GST experts at LegalRaasta. You can get comprehensive assistance on GST Enrolment and GST online. You can also use our GST software for doing end-to-end GST compliance.