Editor's note: It has been a year since the Narendra Modi government rolled out the Goods and Services Tax (GST), on 1 July, 2017. The introduction of the indirect tax regime marked the end of over a decade of wrangling, when politicians struggled to build consensus across party lines. Firstpost is publishing a series of articles wherein experts will analyse the triumphs and the pitfalls of the roll out of the GST.
On 1 July, 2017, India witnessed the birth of a new Indirect tax reform – the Goods and Services Tax (GST). GST, tagged as “One Nation One Tax”, was introduced with the objective of bringing a simplified tax regime for the industry.
One might say that a year’s time is too short to assess the success of a tax revolution as we have changed our 70-year old history of indirect taxation. On the other hand, it is also the right time to look back at the journey and appreciate the government’s efforts in streamlining the dynamics of the new indirect tax regime.
While the road to transition from the erstwhile regime was smooth for the majority of the industry, others experienced a bumpy ride. Each sector was faced with a different set of challenges, varying from extensive alteration in IT systems to aligning with the provisions of the new tax regime, ambiguities arising on account of new tax provisions, among others.
This article intends to highlight the journey of the restaurant industry during the first year of the GST’s implementation.
Under the erstwhile regime, restaurants had a complex tax structure. There was a dual levy of service tax and value added tax (VAT) on supplies made by restaurants.
The industry expected that with the introduction of GST, they will be subject to a single-rate tax structure on supplies.
To an extent, the introduction of GST did bring some relief to such industry as the existing dual levy of tax, on supplies made by restaurants was replaced by a single tax rate on supply of food. However, since alcohol was kept outside the ambit of the GST, Value Added Tax (VAT) was still required to be paid on the supply of alcohol made by restaurants.
One may say that to a large extent, the complexity of the tax structure for restaurants has been streamlined.
Initially the restaurant sector was subject to the levy of a standard rate of 18 percent. It was anticipated by the consumer that post the introduction of GST, the price would fall due to the removal of the cascading effect of taxes, by subsuming multiple taxes and ensuring a seamless flow of credit. However, this aspect was not uniformly noticed across the restaurant sector.
The government believed that the Input Tax Credit (ITC) that the industry was receiving, was not being passed on to the consumer by way of a reduction in prices.
Accordingly, a stringent step was taken by the government by bringing down the tax rate to five percent in respect of supplies made by restaurants subject to the restriction that no ITC can be availed by such restaurants. The same also forced the sector to change their billing system and underlying IT configurations over a very short span of time, as the same was barely ready post implementation on 1 July, 2017.
The imposition of a restriction on availing of ITC is not in line with the basic underlying objective of GST i.e. removal of the cascading effect of taxes by subsuming multiple taxes and ensuring a seamless flow of credit. Further, tax paid on inter-state branches/ warehouse movements also add up to the operational cost.
Post 15 November, 2017, the industry was hit by another challenge, as leading restaurant companies received anti-profiteering notices from anti-profiteering authorities. The said notices were issued pursuant to complaints received from consumers that restaurant companies were not passing on the benefit of a reduction in tax rate (from 18 percent to 5 percent) to them. As on date, no formal order has been issued in the public domain as a result of such an investigation.
The restriction of ITC indirectly lead to an increase in the operational cost of restaurants. Statements have been issued by a few restaurant chains that they will be shutting down their operations due to GST being levied on high rentals for which ITC is not available. Further, there has been some news about certain restaurant chains that have also put expansion plans on hold.
Various experts believe that such an increase in cost under the new GST regime had a negative impact on restaurant growth rates in terms of number of stores. The same is mainly due to high roll out costs and high rentals, as the GST paid on such procurement is not available as ITC to restaurants.
To an extent, the industry is still witnessing a levy of dual taxes on its supplies as alcohol has been kept outside the ambit of the GST and the power to levy a tax on the same still vests with the state governments. The levy of VAT on alcohol coupled with the levy of GST on non-alcoholic supplies has increased the compliance complexity for restaurants serving alcohol.
With the upcoming monsoon session, the restaurant industry is hoping for a removal of restrictions on availing of ITC as the same would lead to a reduction in costs.
The industry also believes that a fear of increasing prices of restaurant supplies can also be managed with the help of anti-profiteering instead of ITC restrictions. Further, the industry also expects the inclusion of alcohol within the umbrella of the GST.
(Rastogi is a Partner – GST and Indirect Tax, at PwC; and Gupta is an Associate Director – GST and Indirect Tax, at PwC.)
Read the other articles from the series here:
Updated Date: Jul 01, 2018 09:15 AM