Eat out, pay less: GST Council reduces tax on restaurant bills by almost 75 per cent
The government assessed that the restaurants were not passing the benefits of Input Tax Credit - a new benefit enjoyed by operators.
The government today signalled that the way to public's heart is through lesser tax for eating out.
After months of debate and customers paying more for food at restaurants the GST council reduced tax rate on restaurant bills by almost 75%. Under the existing GST rule AC restaurants were charging 18% GST. Today, the council went way beyond the recommendations of a group of ministers and created a flat 5% rate for all kind of restaurants.
However, eating at high-end restaurants in hotels which charge a tariff of Rs 7500 per night or above will continue to invite 18% tax.
The decision will reverse the existing rates of 18% at AC restaurants and 12% at non-AC restaurants. The government had suggested a flat 12 percent rate for all kind of restaurants.
But, the GST council driven by a government which is out to do an image correction over GST, decided to push the rate lower. While the council created an incentive for the consumer with a move which will bring down prices, its decision is perhaps one of the first strong anti-profiteering measures against assessees who have become part of the GST.
During the deliberations on how much tax should be there on restaurants, almost all members of the council agreed that restaurants were chaffing the new GST rates since July 1 this year, and food bills had gone up displeasing the public.
The government assessed that the restaurants were not passing the benefits of Input Tax Credit - a new benefit enjoyed by operators. This meant restaurants were making gains and causing pain to the public. Input credit means, at the time of paying tax on output, a producer, trader or service provider can reduce the tax already paid on inputs.
Finance minister Arun Jaitley, in a post meet briefing said, "Restaurants were not passing the benefits accruing to them due to income credit. That's why now restaurants will charge less tax from clients and wouldn't get input tax credit".
The new tax may be 13% lesser but prices in restaurants will not fall as much as the rate cut. Restaurants can still keep rates high claiming they aren't getting back the taxes they paid in procuring the inputs for the establishment.
The move is part of the government's attempts to end the negative perception due to increased bills at restaurants after GST was implemented, especially among the middle class, and what the many In the BJP call the aspirational class.
Some hotel and restaurant associations reacted with caution.
They said, reduced incidence of tax was a welcome move as it would help rationalisation of prices. The sharp cut also surprised many as they wanted twin rates a 12% with input credit and 5% without input credit. Now many in the business are complaining that removing input tax credit goes against the spirit of GST. The move will bring down the profit margins for restaurants as they were pocketing the input tax credit. Now they have to either increase rates or pass reduced tax benefit to consumers and simply grin and bear it.
A senior revenue department official, however, said that the success of a tax regime depends on the volumes. "If taxes are rational volumes go up and add to the revenue offsetting the loss in earning due to the reduction. Low restaurant bill will bring more to eat out", he said.
The restaurant industry was provided yet another relief by the finance minister. Jaitley said that the annual turnover threshold on the composition scheme will be raised from Rs 1 crore to Rs 1.5 crore after the law is amended to raise the turnover ceiling for eligibility of composition.
Finance secretary, Hasmukh Adhia said, "The law will be amended to raise the ceiling to Rs 2 crore. The limit will be raised immediately after the law is amended to Rs 1.5 crore."
Under the scheme, traders, manufacturers and restaurants can pay tax at 1, 2 and 5 percent, respectively. Adhia said that the council has also decided to fix a uniform rate of 1 percent for traders and manufacturers.
The move to widen the turnover threshold is expected to ease the compliance burden for assessees. They will have to file returns only once in a quarter as against monthly returns filed by other tax payers.