According to the Food Service and Restaurant Business Report 2022–23 by Francorp and Restaurantindia.in, India’s food service market is anticipated to project robust growth with an impressive CAGR of 11.19 per cent, increasing from USD 41.1 billion in 2022 to USD 79.65 billion by 2028. However, the amount of tax cost for businesses significantly impacts their investments and growth. In India, the Goods and Services Tax (GST) rate on the supply of restaurant services has undergone multiple amendments since July 2017. These alterations to the GST rate entry have completely revamped tax structures and created Pandora’s box of problems for the hospitality industry.
Outline
- Introduction
- Impact of GST Amendments on the restaurant industry
- Notices issued by Anti-Profiteering Authorities
- Legal challenges by restaurants
- Interpretational issues under GST law
- Definition of restaurant services
- Qualification for the 5 per cent GST rate
- Clarity from the Central Board of Indirect Taxes & Customs (CBIC)
- Entities qualifying as restaurants
- Inclusion of various food service providers
- Clarifying the scope of restaurant services
- Eligibility for the lower GST rate
- Sale of pre-cooked food items
- Concerns regarding the applicability of the lower rate
- Recent proposals and rulings
- Impact on the restaurant industry
- Representations and open issues
- Conclusion
Article
Introduction
India’s foodservice market is on a trajectory of rapid growth, with a projected CAGR of 11.19 per cent from 2022 to 2028, as stated in the Food Service and Restaurant Business Report 2022–23 by Francorp and restaurantindia. However, this flourishing industry has been facing significant challenges due to the complex and ever-changing Goods and Services Tax (GST) regulations. The frequent amendments to the GST rate on the supply of restaurant services have created a plethora of issues for the hospitality sector, hindering its growth potential.
Impact of GST amendments on the restaurant industry
The restaurant industry has been grappling with the repercussions of the GST amendments. One notable change was the reduction of the GST rate from 18 per cent to 5 per cent. However, this reduction was accompanied by numerous notices issued by the Anti-Profiteering Authorities. These notices targeted restaurants operating outside specified premises and restricted their ability to discharge GST at 18 per cent while availing of Input Tax Credit (ITC). As a result, Hardcastle Restaurants Private Limited and Inox Leisure Limited filed writ petitions before the Gujarat High Court, challenging this restriction on the availment of ITC by restaurants.
Legal challenges by restaurants
The GST amendments have led to several real-time issues and interpretational challenges under the GST law. The hospitality sector finds itself entangled in a web of legal complexities, seeking clarity on various aspects of the GST regime. The ambiguity surrounding the tax treatment of restaurant services has posed significant hurdles for both existing players and potential new entrants in the market.
Definition of restaurant services
To understand the issues plaguing the restaurant industry, it is essential to analyze the provisions of the GST law. Entry 6(b) to Schedule II of the CGST Act, 2017 states that the “supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration, shall be treated as a composite supply of services.” In simpler terms, the supply of food and beverages is treated as a composite supply of services when provided as:
(a) a service, (b) a part of a service, or (c) in any other manner.
Furthermore, the Notification specifying the GST rate applicable to the supply of services defines the term “restaurant service” as the “supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.”
Qualification for the 5 per cent GST rate
Based on the definition mentioned earlier, the supply of food and beverages by a restaurant qualifies as a composite supply of services and is subject to GST at a rate of 5 per cent without the availability of Input Tax Credit. The Central Board of Indirect Taxes & Customs (CBIC) has provided further clarity by explaining that services provided by an entity through cooking and the supply of food, including takeaway and door delivery services, qualify as restaurant services. In essence, any entity that prepares and supplies food at its premises is considered a restaurant under the GST law.
Entities qualifying as restaurants
The scope of the term “restaurant” extends beyond traditional establishments. Restaurants, cloud kitchens, units located in food courts situated in malls, and snack bars in multiplexes all fall under the purview of the term “restaurant” for GST purposes. Even roadside food stalls and food trucks are covered within the definition of a restaurant. In the case of M/s. Jabalpur Entertainment Complexes P. Ltd., it was held that the supply of food, soft drinks, and snacks sold in the Food Court and Snack Bar of the mall and multiplex, respectively, qualifies as the supply of restaurant services.
Sale of pre-cooked food items
An interesting question arises regarding outlets that supply food by merely heating pre-cooked food items. Are they eligible to claim the benefit of the lower GST rate? In Pioneer Bakers, it was clarified that a restaurant is a place where meals are both prepared and served to consumers. The preparation of food by cooking in the restaurant is essential, and merely serving food after heating does not fulfil the criteria of a restaurant. The CBIC has also clarified that ice-cream parlours selling pre-manufactured ice cream without undertaking cooking or preparation of ice cream for consumption, similar to a restaurant, would be considered as the supply of goods and not the supply of restaurant services.
Eligibility for the lower GST rate
Once an entity qualifies as a restaurant, it should satisfy the conditions of the entry prescribing the lower GST rate. Consequently, all supplies made by such a restaurant would be subject to GST at the prescribed rate of 5 per cent without the availability of Input Tax Credit (ITC). This principle was upheld in the cases of Kundan Misthan Bhandar and Gangaur Sweets. However, the recent proposals discussed in the 31st GST Council Meeting introduced the notion that the nature of a business establishment supplying food, drinks, and other articles for human consumption should not determine whether the supply is categorized as goods or services. Instead, the classification would depend on the constituents of each individual supply. While this proposal was debated, no formal clarification has been issued yet.
Recent proposals and rulings
Despite the lack of formal clarification, negative rulings have been made regarding the sale of readily available food items that are not prepared or cooked in the restaurant. These items, sold over the counter for consumption in the restaurant or as takeaways, are not considered “restaurant services” but rather the supply of goods. The inconsistent interpretations and classifications of supplies have only added to the challenges faced by the restaurant sector, creating difficulties for existing players and discouraging new entrants. The industry’s leading bodies have made representations to address these issues, but clarifications are still awaited. Resolving these matters will significantly contribute to minimizing unnecessary litigation.
In conclusion, the GST issues faced by the restaurant industry in India have created a complex environment, with multiple interpretations and rulings adding to the confusion. Understanding the provisions of the GST law, particularly the definition of restaurant services and the eligibility criteria for the 5 per cent GST rate, is crucial for restaurants to navigate through these challenges. However, the lack of clarity on certain aspects and the differing interpretations have resulted in ongoing uncertainties and legal disputes. It is imperative for the relevant authorities to provide timely and comprehensive clarifications to address the concerns of the restaurant industry and foster a more conducive business environment.
FAQs
- Can all food-related businesses avail of the 5 per cent GST rate?
No, only entities that meet the definition of a restaurant under the GST law can avail of the 5 per cent GST rate on their supplies of food and beverages. The criteria include providing services through cooking and supplying food at the premise itself. - Are pre-cooked food items subject to a lower rate of GST?
Pre-cooked food items sold by a restaurant, which qualifies as a restaurant under the GST law, are subject to the 5 per cent GST rate. However, it is important to note that heating pre-cooked food items alone does not meet the criteria of a restaurant, as the preparation of food by cooking in the restaurant is essential. - Why are there different interpretations of the GST law for the restaurant sector?
The lack of specific clarity and differing interpretations of certain provisions in the GST law have led to varying views on the classification and taxation of supplies in the restaurant sector. These inconsistencies have caused confusion and disputes among businesses and authorities. - What are the challenges faced by the restaurant industry due to GST issues?
The restaurant industry in India faces challenges such as multiple interpretations of GST provisions, disputes related to the eligibility for lower tax rates, and the issuance of notices by the Anti-Profiteering Authorities. These challenges create uncertainties, discourage new players, and result in unnecessary litigation. - What steps can be taken to address GST-related issues in the restaurant industry?
To address GST-related issues, the restaurant industry seeks clarifications from the authorities on various open issues and concerns. Timely and comprehensive clarifications can help minimize disputes, provide guidance to businesses, and foster a more stable and favourable environment for the industry.