Applicability of GST on Restaurant Services in India

GST is a single tax system started in India on July 1, 2017, replacing different indirect taxes like VAT and service tax to make tax filing easier and simpler. This aims to simplify the taxation process and create a single market across the country.

Understanding how GST applies to restaurant services is crucial for both consumers and business owners. The tax rate varies based on factors such as the type of establishment, location, and services offered. This article aims to clarify the applicability of GST on restaurant services in India, which will help readers navigate the complexities of restaurant taxation.

Understanding GST on Restaurant Services

GST is aimed at simplifying the taxation process and creating a single market across the country. The following details will help you understand the role and impact of GST on restaurant services:

• Role of GST in Standardizing Tax Rates

GST has standardized tax rates across various sectors, which include the restaurant industry. The tax rate for restaurant services varies based on factors such as the types of establishments, location, and amenities offered. Standalone restaurants typically attract a 5% GST rate without the option to claim Input tax credit (ITC), while restaurants within hotels may have different rates depending on the room tariff. This tiered system was designed to accommodate the diverse nature of the food service sector, from small eateries to luxury restaurants.

• Impact of GST on The Restaurant Industry

The introduction of GST has had a significant impact on the restaurant industry. GST replaced many indirect taxes with one simple tax, making it easier for restaurant owners to follow the rules. It also improved cash flow by allowing the smooth use of Input Tax Credit (ITC) on purchases and expenses. The varying tax rates based on establishment type and location have introduced complexities in pricing and compliance. GST has created a more transparent and uniform tax structure for the restaurant industry, which leads to reduced tax evasion and better compliance.

Types of Applicability of GST on Restaurants

Under the GST system in India, restaurants are taxed differently based on where they are located and the type of service they offer. Let us discuss them briefly:

5% GST: For Most Standalone Restaurants

• Who It Applies to: This lower tax rate is charged by most regular restaurants that are not part of a hotel. It covers dine-in, takeaway, and home delivery services.
• Air-Conditioning Doesn’t Matter: Whether the place has an AC or not, the GST rate remains 5%.
• No Input Tax Credit (ITC): These restaurants cannot claim a refund for the GST they pay on raw materials like food ingredients or services like maintenance. This means they bear the extra cost, which can affect their profit margin.

18% GST: For Restaurants in Expensive Hotels

• Who It Applies to: This higher tax rate is charged by restaurants inside hotels where the room rate is more than Rs. 7,500 per night.
• Input Tax Credit (ITC) allowed: These restaurants are allowed to claim ITC. This means they can reduce their tax liability by subtracting the GST they already paid on goods and services used in running the restaurant, like food, equipment, and furniture.

GST Rates for Different Types of Restaurants

The GST rates for restaurants in India are not the same for everyone. They depend on things like whether the place is air-conditioned, if it serves alcohol, and where it's located. The below mentioned details include the GST on restaurants:

Non-AC Restaurants (No Alcohol): 5% GST

• These are regular eateries without air-conditioning and that do not serve alcohol
• They are charged 5% GST.
• No Input Tax Credit (ITC) is allowed, which means they can’t get back the tax they paid on things like ingredients, furniture, or services.

AC Restaurants (No Alcohol): 12% GST

• Restaurants with air-conditioning, even if it’s just in one part, but not serving alcohol, fall under this category.
• They are taxed at 12% GST.
• In most cases, ITC is not available unless they are part of a hotel with higher room tariffs.

Restaurants Serving Alcohol: 18% GST

• Whether they have AC or not, any restaurant that serves alcohol is charged a higher 18% GST.
• Input Tax Credit is allowed, which helps them save on their tax payments by adjusting the GST they pay on their purchases.

Restaurants at Airports: 18% GST

• Food outlets or restaurants inside airport premises are also taxed at 18% GST, just like those that serve alcohol.
• They can also claim ITC, which helps manage costs for these premium-location outlets.

GST Composition Scheme for Restaurants

The GST Composition Scheme is an easy, optional tax plan made to help small businesses pay taxes simply. Restaurants that are opting for this scheme pay a fixed tax rate of 5% on their total turnover, without the ability to claim ITC. This means they are unable to claim input tax credit, so the GST paid on purchases increases their overall tax burden. The scheme is ideal for small eateries focusing on local operations. ?

Eligibility Criteria

To qualify for the Composition Scheme, restaurants must meet the following eligibility criteria:

• Having an annual turnover that does not exceed Rs. 1.5 crore and Rs. 75 lakhs for special category states, such as those in the Northeast.
• Operate solely within their state and do not make interstate sales.
• Not serving alcohol, as it is outside the GST scope.
• Avoid selling through e-commerce platforms like Swiggy or Zomato.
• Not claiming Input Tax Credit.
• Display "Composition taxable person" on all invoices and at their business premises. ?

Key Features

• Tax Rate: 5% on total turnover, which is 2.5% CGST + 2.5% SGST.
• Invoice: Issue a "Bill of Supply" instead of a tax invoice; cannot collect tax separately from customers
• Returns: File quarterly returns using Form CMP-08 and an annual return via GSTR-4
• No ITC: Cannot claim Input Tax Credit on purchases.
• Restrictions: Cannot engage in interstate sales or supply through e-commerce platforms.

Process of GST Registration for Restaurants

The details below include the process of GST registration for restaurants:

• Visit the GST Portal: Go to the official GST website and click on the "Register Now” option.
• Fill Out Part A of Form GST REG-01: Provide basic details such as your name, PAN, email, and mobile number. ?
• Verification: Enter the OTPs sent to your email and mobile to verify your contact details. ?
• Receive Temporary Reference Number (TRN): After verification, you will receive a TRN (Temporary Reference Number), which lets you continue to fill out Part B.
• Fill Out Part B of Form GST REG-01: Log in with your TRN and provide the detailed business information, which includes the documents listed below. ?
• Submit the Application: After uploading all documents, submit the application using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC). ?
• Application Processing: The GST officer will be reviewing your application. If everything is correct and in order, you will receive your GSTIN (GST Identification Number) within 7 working days.

Documents Required in GST Registration for Restaurants

You need to ensure you have the following documents before initiating the registration:

• PAN Card of the business or proprietor
• Aadhaar Card of the owner or authorized signatory
• Proof of Business Registration, such as a partnership deed or incorporation certificate.
• Address Proof of the business premises, such as an electricity bill or rent agreement.
• Bank Account Details, such as a canceled cheque or a bank statement
• Digital Signature Certificate (DSC) for companies and LLPs
• Photographs of the proprietor or authorized signatory

GST on Food Items Served in Restaurants

The below-mentioned details include the GST rates on popular food items, and this list is not exhaustive:

Understanding GST Returns: GSTR-1 and GSTR-3B

GSTR-1: This return records all outward supplies or sales made in a tax period. It is filed monthly or quarterly based on turnover, usually by the 11th of the next month.

GSTR-3B: This monthly summary return shows total sales, purchases, input tax credit claimed, and tax to be paid. It is usually filed by the 20th of every month.

Common GST Offenses for Restaurants

The following details include the common GST offenses for restaurants:

• Not Registering for GST: If your restaurant’s annual turnover exceeds Rs. 20 lakhs and Rs. 10 lakhs in special category states, and you are not registered under GST, you could face penalties.
• Incorrect Invoicing: Issuing bills without proper GST details or not issuing bills at all is a violation.
• Collecting but Not Remitting GST: If you collect GST from customers but don’t deposit it with the government within three months, it is considered an offense.
• Claiming False Input Tax Credit (ITC): Using fake invoices to claim ITC without actual purchases is illegal.
• Suppressing Sales: Deliberately hiding sales to reduce tax liability is a serious offense.

Penalties for Non-Compliance

Let us discuss the penalties for non-compliance with GST on restaurants:

• Late Filing of Returns: A late fee of Rs. 100 per day for CGST and SGST, totaling Rs. 200, with a maximum of Rs. 5000.
• Not Filing Returns: A penalty of 10% of the tax due or Rs. 10,000, whichever is higher.
• Fraudulent Activities: If you are found guilty of fraud, the penalty is 100% of the tax due or Rs. 10,000, whichever is higher. In severe cases, imprisonment can range from 1 to 5 years, which depends on the amount of tax evaded.
• Aiding in Fraud: Helping someone commit GST fraud can result in a penalty of up to Rs. 25,000.

Recent Changes in GST on Restaurant Services

The 55th GST Council meeting introduced significant amendments to the GST structure for restaurants, particularly those operating within hotels. These changes aim to simplify the tax system and align it more closely with the actual value of services provided. ?

Key Amendments:

Elimination of "Declared Tariff"

Previously, GST rates for hotel restaurants were based on the "declared tariff," which often led to confusion due to varying discounts and offers. The new system replaces this with the "actual value of supply," which means the GST rate is now determined by the actual room rates charged in the previous financial year.

Revised GST Rates Based on Room Tariffs

• Hotels with Room Tariffs Above Rs. 7500: Restaurants in such hotels charge 18% GST, and customers get the benefit of Input Tax Credit (ITC) too.
• Hotels with Room Tariffs of Rs. 7500 or Below: Restaurants here will continue to be taxed at 5% GST, but without the benefit of ITC.

Option for Hotels to Opt for 18% GST

Hotels, regardless of their room tariffs, can choose to apply the 18% GST rate with ITC for their restaurant services by submitting a declaration before the start of the financial year or at the time of registration.

Impact on Restaurant Businesses

• For High-End Hotels: The ability to claim ITC under the 18% GST rate can help offset higher input costs, which potentially leads to more competitive pricing. ?
• For Mid-Range and Budget Hotels: Maintaining the 5% GST rate without ITC keeps the tax burden low, but these establishments cannot offset input taxes, which may affect profitability. ?
• Operational Clarity: Linking GST rates to actual room tariffs provides clearer guidelines, which reduces disputes and simplifies compliance. ?

Government's Rationale Behind the Amendments

The primary goal of these changes is to simplify the GST framework and make it more transparent. By basing tax rates on actual transaction values rather than declared tariffs, the government aims to do the following: ?

• Ensure fairness in taxation.
• Reduce ambiguities and disputes.
• Provide flexibility to businesses in choosing their tax structure based on their operational model. ?

These amendments are part of the government's broader efforts to streamline tax compliance and support the hospitality sector's growth.

GST on restaurants has made the tax rules simpler and more transparent. While it removed many old taxes and gave clarity, small restaurants can't claim tax credits, which may affect their profits. High-end hotels have some benefits, like claiming tax back. Understanding GST helps both restaurant owners and customers make better decisions. Since the rules can change, it is always a good idea to stay updated and seek help from experts if needed to avoid confusion and stay compliant. This article provided you with detailed information on GST for restaurants. To get assistance and guidance in filing a GST registration for restaurants, contact Online Legal India.