Impact of GST on Restaurants – A Comprehensive Guide

GST (Goods and Services Tax) is a single tax system that has replaced many older taxes. It is very important for restaurant owners because it affects how they price food, charge customers, and pay taxes. Restaurants must follow GST rules based on their type, such as dine-in, delivery, or takeaway. This article will help you understand GST registration for restaurants, who needs it, and how it works for different restaurants.

What is GST Registration?

GST registration is the process of officially enrolling your business under India’s Goods and Services Tax system. If your business’s annual sales exceed Rs. 40 lakhs or Rs. 20 lakhs in certain states, you must register to get a unique GST identification number (GSTIN). This number allows you to collect GST from customers and claim tax credits. Registering ensures that your business complies with tax laws and operates smoothly.

Who Needs GST Registration?

GST registration is essential for businesses in India to comply with tax laws and operate legally. The following details include who needs to register for GST:

Businesses Based on Turnover

• Goods Suppliers: If your annual turnover exceeds Rs. 40 lakhs, GST registration is mandatory.
• Service Providers: For those offering services, the threshold is Rs. 20 lakhs.
• Special Category States: In states like Arunachal Pradesh, Manipur, and Sikkim, the limits are lower, Rs. 20 lakhs for goods and Rs. 10 lakhs for services.

Previously Registered under Old Tax Systems

If you were registered under former tax systems like Excise, VAT, or Service Tax, you must register under GST to continue your business legally.

Interstate Suppliers

Businesses that supply goods or services across state borders must register for GST, irrespective of their annual turnover.

Casual and Non-Resident Taxable Persons

• Casual Taxable Person: Someone who occasionally supplies goods or services in a state where they don't have a fixed place of business.
• Non-Resident Taxable Person: An individual or business located outside India that supplies goods or services within India.

Agents and Input Service Distributors

• Agents: Individuals or entities acting on behalf of another supplier.
• Input Service Distributors: Businesses that receive invoices for services used by multiple branches and distribute the tax credit accordingly.

Reverse Charge Mechanism

If you're liable to pay tax under the reverse charge mechanism where the recipient, not the supplier, pays the tax you must register for GST.

E-commerce Participants

• Suppliers via E-commerce Platforms: If you sell goods or services through online platforms, you need to register for GST, regardless of your turnover.
• E-commerce Operators: Platforms such as Amazon or Flipkart must register and collect Tax Collected at Source (TCS) under Section 52 of the CGST Act.
• Specific Services under Section 9(5): For services like ride-sharing or food delivery, the e-commerce operator is responsible for paying GST, not the individual service providers.

Government Entities Deducting TDS

Government departments or agencies that deduct Tax Deducted at Source (TDS) under Section 51 of the CGST Act are required to register for GST.

Overseas Online Service Providers

If you're based outside India and provide online services (like digital content or gaming) to customers in India, you must register for GST, even if the recipient isn't registered.

Types of GST Applicable to Restaurants

Under India’s goods and services tax system, restaurants are subject to different tax rates based on factors such as their operational model, annual turnover, and services offered. Let us discuss the types of GST applicable to restaurants:

GST Rates and Impact of GST on Restaurants

• 5% GST: This rate is applied to most standalone restaurants, whether they have air conditioner or not, and also includes delivery services and takeaway. These establishments cannot claim Input Tax Credit (ITC).
• 18% GST: Restaurants located within hotels where the room tariff exceeds Rs. 7500 per night fall under this category. These establishments can claim ITC, which allows them to offset the tax paid on inputs against their tax liability.

AC vs Non- AC Restaurants

GST rates differ on the basis of whether a restaurant has an air conditioner. Now, both AC and non-AC standalone restaurants are taxed at 5% without ITC. The difference primarily affects restaurants within hotels, as it is mentioned above.

Input Tax Credit (ITC) Eligibility

• Eligible for ITC: Restaurants that charge 18% GST, such as high-end hotels, can claim ITC. This means they can reduce their tax liability by the amount of GST paid on purchases such as raw materials and services.
• Not Eligible for ITC: Standalone restaurants that charge 5% GST cannot claim ITC, which may affect their pricing and profitability.

GST Rates for Restaurant Services

Under India's Goods and Services Tax (GST) system, restaurants are taxed based on various factors such as air-conditioning, alcohol service, and location. The following details include the GST rates for restaurant services.

• Non-AC Restaurants (No Alcohol): These establishments are taxed at 5% GST without the benefit of Input Tax Credit (ITC).
• AC Restaurants (No Alcohol): Air-conditioned restaurants that do not serve alcohol attract a 12% GST rate.
• Restaurants Serving Alcohol: Regardless of air-conditioning, any restaurant serving alcohol is subject to 18% GST.
• Airport Restaurants: Restaurants located within airport premises also fall under the 18% GST bracket.

It is important to remember that while GST applies to food and non-alcoholic beverages, alcoholic drinks are taxed separately under state-level Value Added Tax (VAT). ?Understanding these distinctions helps both consumers and restaurant owners navigate billing and compliance effectively.

GST Composition Scheme Rules for Restaurants

The GST Composition Scheme offers a simplified tax structure for small restaurants in India, which aims to reduce compliance burdens. The details below include GST composition scheme rules for restaurants:

Eligibility Criteria

• Annual Turnover: Restaurants with a turnover up to Rs. 1.5 crore can opt for this scheme. For special category states such as Arunachal Pradesh, Manipur, and others, the limit is Rs. 75 lakhs.
• Nature of Business: Applicable to restaurants not serving alcohol. Establishments serving liquor are excluded, as alcohol is taxed separately by states.
• Supply Restrictions: Only intra-state which means within the same state supplies are permitted. Inter-state sales disqualify a restaurant from this scheme.
• E-commerce Sales: Restaurants selling through e-commerce platforms that collect tax at source (TCS) are not eligible for this scheme.

Key Features

• Tax Rate: A flat 5% GST is levied on total turnover that is 2.5% CGST + 2.5% SGST.
• No Input Tax Credit (ITC): Restaurants cannot claim ITC on purchases.
• Billing: Cannot collect GST from customers separately. Bills must state "Composition taxable person, not eligible to collect tax on supplies."
• Returns Filing: Simplified returns with quarterly payments (Form CMP-08) and an annual return (Form GSTR-4).

Identifying Restaurants under the GST Composition Scheme

Restaurants opting for the GST Composition Scheme must adhere to specific display and billing requirements to ensure transparency and compliance:

1. Bill of Supply Requirements

Such restaurants are prohibited from issuing tax invoices or collecting GST from customers. Instead, they must issue a Bill of Supply that clearly states that “Composition taxable person, not eligible to collect tax on supplies”. This declaration informs customers that the restaurant is under the Composition Scheme and does not charge GST separately.

2. Display at Business Premises

Restaurants under this scheme are required to prominently display the phrase “Composition taxable person” on every notice or signboard at their principal place of business and all additional places of business. ?These measures ensure that customers are aware of the restaurant's tax status, promoting transparency and compliance with GST regulations.

Process of GST Registration for Restaurants

Getting your restaurant registered under GST is an important legal step in India. Here is the process of GST registration for restaurants:

• Apply for GSTIN: Visit the official GST website and fill out the online form to get your GST Identification Number (GSTIN), which is a 15-digit unique number given to each registered business.
• Enter Business Details: You will need to share basic information like your business name, address, and type, such as sole proprietorship, partnership, or private company.
• Upload Required Documents: You need to provide scanned copies of your PAN card, Aadhaar card, bank account details, and proof of business address. Proof can be a rent agreement, an electricity bill, or property papers.
• Verification: After you submit your application, a GST officer will check your details. If everything is correct and in order, your registration will be approved.
• Get GST Certificate: Once your application is approved, you will receive your GST certificate online. It confirms your registration and includes your GSTIN.
• Display GSTIN: You must clearly show your GSTIN at your restaurant, as this is a legal requirement.

GST Compliance After Registration

After obtaining GST registration, it is crucial to understand and adhere to the compliance requirements to avoid penalties and ensure smooth business operations.

Display GST Details on Your Business Premises

Prominently display your GST Registration Certificate and GSTIN at your principal location of business and any additional locations. This transparency builds trust with customers and authorities.

Issue GST-Compliant Invoices

For every sale, issue invoices that include:

• Your GSTIN and business details
• Unique invoice number and date
• Recipient’s GSTIN (if applicable)
• HSN/SAC codes for goods/services
• Taxable value, tax rate, and amount
• Place of supply
• Signature or digital signature

Ensure invoices are accurate to facilitate input tax credit (ITC) claims for your customers.

Maintain Proper Records

Keep detailed records of sales and purchases, stock levels, input tax credit claims, and tax payments?. These records should be kept and stored for at least six years and can be maintained electronically using accounting software.

File GST Returns Timely

Depending on your business type and turnover, file the appropriate GST returns:

• GSTR-1: Details of outward supplies
• GSTR-3B: Monthly summary of inward and outward supplies
• GSTR-9: Annual return?

Ensure returns are filed within the due dates to avoid penalties.

Charge and Collect GST

Charge GST on taxable sales at the applicable rates (5%, 12%, 18%, or 28%) and collect the tax from your customers. Deposit the collected GST with the government by filing GSTR-3B.

Avail Input Tax Credit (ITC)

Claim ITC on GST paid for business-related purchases by ensuring the following:

• You have valid tax invoices
• Suppliers have uploaded their invoices in GSTR-1
• Reconcile your ITC claims with GSTR-2A to avoid discrepancies

Generate E-Way Bills When Required

For the movement of goods exceeding Rs. 50,000 in value, generate an e-way bill to comply with transport regulations. Ensure the e-way bill is valid and accompanies the goods during transit.

Reverse Charge Mechanism Awareness

Under the reverse charge mechanism, certain transactions require the recipient to pay GST instead of the supplier. Stay informed about such transactions to ensure compliance.

Educate Your Team

Train your employees on GST compliance requirements, including invoicing, record-keeping, and return filing. An informed team helps in maintaining consistent compliance.

Seek Professional Assistance

Consider consulting with a tax professional or GST consultant to navigate complex compliance requirements and stay updated with any changes in GST laws.

Benefits of GST Registration for Restaurants

If you run a restaurant, registering under GST can be a smart move with many long-term benefits. Let us discuss the benefits of GST registration for restaurants:

• Legal Recognition and Trust: Obtaining a GST registration provides your restaurant with official recognition from the government. This not only enhances your credibility among customers and suppliers but also ensures compliance with tax laws.
• Simplified Tax Structure: Before GST, restaurants had to deal with multiple taxes like VAT, service tax, and excise duty. GST has consolidated these into a single tax, which makes the taxation process more straightforward and reduces the chances of errors.
• Input Tax Credit (ITC): If your restaurant is eligible, GST registration allows you to claim ITC. This means you can reduce the tax you pay on inputs like raw materials and services from your overall tax liability, which leads to cost savings.
• Eligibility for the Composition Scheme: Small restaurants with an annual turnover below Rs. 1.5 crore can opt for the GST Composition Scheme. Under this, you pay a fixed 5% tax on your turnover, simplifying compliance and reducing paperwork.
• Expansion Opportunities: GST registration facilitates smoother expansion across states, as it standardizes tax rates and compliance procedures nationwide. This is particularly beneficial if you plan to open new outlets in different regions.
• Partnerships with Online Platforms: Many food delivery services and online platforms prefer or require restaurants to be GST-registered. This opens up additional revenue streams and increases your restaurant's visibility.
• Avoidance of Penalties: Operating without mandatory GST registration can lead to penalties, so by registering, you ensure compliance and avoid potential fines.

How GST Registration Affects Restaurant Owners?

The introduction of the Goods and Services Tax (GST) has significantly changed how restaurants operate in India. While it has simplified taxation, it also brings new responsibilities, which are mentioned as follows:

• Simplified Tax System

Before GST, restaurants had to manage multiple taxes like VAT, service tax, and others, which made accounting complex. GST has combined these into a single tax, which makes it easier to handle and understand.

• Input Tax Credit (ITC)

Registered restaurants can benefit from ITC, which allows them to deduct the GST paid on purchases like ingredients and equipment from their tax liability. This helps in reducing overall costs and improving cash flow.

• Compliance Requirements

With GST, restaurants must maintain detailed records and file regular returns. This means investing in proper accounting systems and possibly hiring professionals to ensure compliance.

• Impact on Pricing

GST rates vary as non-AC restaurants are taxed at 5%, while AC restaurants and those serving alcohol are taxed at 18%. This can influence menu pricing and customer decisions.

• Growth and Expansion

GST registration facilitates easier expansion across states, as it standardizes tax rates and compliance procedures nationwide. This is particularly beneficial if you plan to open new outlets in different regions.

• Building Credibility

Being GST-registered enhances a restaurant's credibility with customers and partners. It shows that the business is compliant with tax laws, which can be a trust factor for many.

Invoicing Requirements for Restaurants Under GST

If you run a restaurant in India and are registered under the GST system, it is essential to know how to issue proper invoices. This ensures compliance with tax laws and also builds trust with your customers.

• Restaurant Information: Your restaurant's name, address, and GST Identification Number (GSTIN).
• Customer Details: If your customer is also GST-registered, include their name, address, and GSTIN.
• Invoice Number: A unique, sequential number for each invoice.
• Date of Issue: The date when the invoice is generated.
• Service Description: Clear details of the food and services provided.
• Total Value: The total amount charged for the services.
• GST Details: Applicable GST rate and the exact amount charged.
• Timeframe for Issuing Invoices: For services like dining, you must issue the tax invoice within 30 days from the date of service delivery.
• Choosing the Right Billing Software: To streamline the invoicing process, consider using billing software that caters to restaurant needs.

Impact of GST for Small vs. Large Restaurants

In India, the Goods and Services Tax (GST) system impacts restaurants differently based on their size and annual turnover.

Small Restaurants (Turnover up to Rs. 1.5 Crore)

Small eateries can opt for the GST Composition Scheme, which simplifies tax compliance. Key features include:

• GST Rate: A flat 5% on total turnover.
• Input Tax Credit (ITC): Not available.
• Interstate Sales: Not permitted.
• E-commerce Platforms: Cannot sell through platforms like Zomato or Swiggy.
• Alcohol Sales: Not allowed under this scheme.

This scheme reduces paperwork and is ideal for local restaurants focusing on dine-in or takeaway services.

Large Restaurants (Turnover above Rs. 1.5 Crore)

Larger establishments must register under the Regular GST Scheme. Features include:

• GST Rate: Typically, 18%, especially for those serving alcohol or located in hotels with room tariffs above Rs. 7500.
• Input Tax Credit (ITC): Available, allowing businesses to offset taxes paid on inputs.
• Interstate Sales: Permitted.
• E-commerce Platforms: Can partner with online delivery services.

While compliance is more complex, benefits like ITC can lead to cost savings and support business expansion.

Choosing the Right Scheme

• Small Restaurants: The Composition Scheme offers simplicity but limits growth opportunities.
• Large Restaurants: The Regular Scheme requires more compliance but provides flexibility and potential tax benefits.

Selecting the appropriate GST scheme depends on your restaurant's size, services offered, and growth plans.

Challenges Restaurants Face Due to GST

Once your restaurant is registered under the Goods and Services Tax (GST) system in India, it is essential to adhere to certain compliance requirements to avoid penalties and ensure smooth operations. ?The challenges are mentioned as follows:

GST Return Filing Basics

As a GST-registered restaurant, you're required to file specific returns:

• GSTR-1: Details of outward supplies (sales) must be filed monthly or quarterly, which depends on your turnover.
• GSTR-3B: A summary return of sales and purchases, along with tax liability needs to be filed monthly.

Timely filing is crucial. Delays can result in late fees of Rs. 100 per day under CGST and Rs. 100 per day under SGST, totaling Rs. 200 per day, up to a maximum of Rs. 5000 per return.

Maintaining Digital Invoices and Records

Proper record-keeping is vital for GST compliance:

• Maintain digital copies of all invoices, bills of supply, credit and debit notes, and other relevant documents.
• Records should be preserved for at least six years from the end of the financial year.
• Utilize reliable accounting software to manage and store records efficiently.

3. Penalties for Non-Compliance

Non-compliance with GST regulations can lead to significant penalties:

• Failure to file returns can attract a penalty of 10% of the tax due or Rs. 10,000, whichever is higher.
• In cases of fraud or intentional tax evasion, the penalty can be 100% of the tax due or Rs. 10,000, whichever is higher.

Ensuring timely return filing and accurate record-keeping helps avoid these penalties and contributes to the smooth functioning of your restaurant business.

GST registration for restaurants is an essential step for businesses in the food industry, ensuring compliance with tax regulations and contributing to the country's economy. By registering under GST, restaurants can claim input tax credits on the goods and services they purchase, which helps lower their tax burden. It also makes the business more professional and transparent, as customers and partners can see that the restaurant is adhering to tax laws. To get assistance and guidance in filing a GST registration and maintaining compliance for your restaurant, contact Online Legal India.