GST on restaurants to reduce, but may not benefit customers
A panel of state finance ministers headed by Assam FM Himanta Biswa Sarma had recommended that goods and services tax (GST) on restaurants be reduced from 18% to 12%. Further, the facility of input tax credit (ITC) should be withdrawn as restaurants gained 6% from ITC which they didn't pass onto customers. The Centre is expected to back this recommendation. Here's more!
What is input tax credit?
Input tax credit means that while paying a tax on output, you can reduce the tax you have paid on the inputs. So, as a manufacturer, if tax on your final product is Rs. 450 and tax paid on inputs is Rs. 300, an input credit of Rs. 300 can be claimed, and only Rs. 150 needs to be deposited as tax.
What is the implication of this recommendation?
Under the current 18% tax regime, restaurants get to claim credits (ITC) of the taxes they pay on things like processed food, rent, electricity and transportation. However, if GST is reduced to 12%, then in the absence of claiming tax rebates under ITC, the cost of running the restaurants will increase. This will increase customers' food bills by 8-10%.
Will this move promote vendors in the unorganized sector?
The National Restaurant Association of India (NRAI) said the best part about GST was ICT which provided all vendors and suppliers, who were earlier in the unorganized sector, an incentive to shift to the organized sector and file tax returns. However, this move of withdrawing ICT will promote restaurants to work with unregistered suppliers of foodstuffs where the dominant mode of transaction is cash.
NRAI doubts the government's calculations
NRAI petitioned the government to go ahead with the cut but retain the ITC. As per NRAI's calculation, a food product's price fell from Rs. 100 to Rs. 99 after the GST was levied. Government feels after claiming ITC, the price was Rs. 94. NRAI questions this calculation, saying "despite the cut, withdrawal of ITC will increase the price to over Rs. 106."
