How GST Has Impacted the Restaurant Industry in India

The introduction of the Goods and Services Tax (GST) in July 2017, brought a tremendous change to the indirect tax system in India. The restaurant business directly impacts consumers, thus the ramifications of GST on pricing, in-put tax credit, compliance and profitability has had significant implications for this industry. Let's see how GST has completely changed the restaurant industry in India.

GST Rates on Restaurants

5% GST (excluding ITC)

Most standalone restaurants, whether they are located in air-conditioned or non air-conditioned areas are at a rate of 5% and they cannot avail of Input Tax Credit (ITC) for raw materials used in production, rents, and other operational services, where they often have to hike menu prices simply to protect their margins.

18% GST (including ITC)

Restaurants located within hotels where room tariffs exceed ₹7,500, were charged at 18%. Those restaurants were able to claim the ITC on some elements for the higher input and operating costs.

Food Delivery Aggregators

The platforms of Zomato and Swiggy from 2022 are required to collect and pay GST on food delivery services. While customers see no separate GST on delivery bills, the aggregator collects and pays it for them to the government.

The rates may have clarified the taxation structure across the restaurant sector but the removal of ITC for standalone establishment businesses has continued to be a significant problem that led to elevation of operating costs and price sustainability.

Refer here: GST on Restaurant Services: Rules & Rates on Food

Positive Impacts of GST on Restaurants

1. Tax Code Simplification

Prior to GST, a restaurant had to deal with a confusing, multi-tax code which consisted of Value Added Tax (VAT), Service Tax, Luxury Tax, Excise Duty, and varying tax structures, rates, return filings and compliance measures. This muddied the waters for both business owners and patrons alike. GST unified all of these indirect taxes into a singular indirect tax code. This reduced administration both legislatively and in business compliance, and brought uniformity across various states which facilitated growth of chains and location expansion for restaurants.

2. Transparency in Billing

Historically, a bill for a customer would have multiple tax components associated with it which was confusing and at times deceptive for the consumer. When charged in a GST context, there is only one thing charging tax on a purchase. GST allows a cleaner bill or receipt for the customer that informs them how much tax they are being charged. This allows for greater transparency between the restaurant and its customer and identifies tax as chargeable.

3. Strengthening the Organized Sector

The launch of GST has been a leap toward formalizing the restaurant sector. Unregistered small restaurants had a cost advantage in the past since they did not comply with service tax or VAT. With GST requiring registration if a restaurant has turnover that exceeded that threshold, more and more eateries came into the taxing jurisdiction. GST has helped organized players and the industry by providing a level playing field and assisting fair competition.

4. Simpler Expansion for Chains and Franchises

The previous compliance system meant large restaurant chains and franchises often dealt with government bodies across multiple states that had different tax structures aimed at the same restaurant industry. With GST, the compliance process to register and remit was standardized at the national levels which not only made compliance easier but incentivized expansion into new markets with less burden of government tax issues.

5. Increased Digitization and Compliance Culture

Since GST requires tax collections through proper invoicing as well as trackable digital records and online submissions and processes, the high number and increase of restaurant establishments has also forced many operators (especially small operators) to begin using digital billing systems.

Challenges Faced by Restaurants

1. Loss of Input Tax Credit (ITC)

A major disadvantage under the GST system is losing ITC for all stand-alone restaurants since they cannot claim credit on things related to operational inputs, including materials, kitchen equipment, rent, or other forms of professional expenses. As such, these expenses are additional operational costs reducing the profitability on what are already tight margins, specifically on smaller to medium-size restaurant operations.

2. Price Adjustments

Without the ITC recovery, when many restaurants adjusted menu pricing to accommodate these losses it came with the exorbitant cost of additional operating expenses. Therefore, while Guests are only paying a total of 5% in GST, they hardly notice that dining out is hardly any better nowadays than it was in 2019 leaving the perception that GST should reduce their bills.

3. Cost of Compliance

Ongoing GST returns and filing, records creating and keeping or in even certain cases e-invoicing has turned into an administrative burden. Smaller establishments, with little or very limited workforce tend to refer to accountant resources or software services which means that it is a growing expense for smaller establishments and the obligation of compliance has only gotten worse.

The Way Forward

While GST is a more streamlined process than the taxes previously in place, the fact that ITC has been taken away can still be a sore point. Some industry experts feel that if restaurant owners were allowed to reclaim ITC, it could reduce costs and keep restaurant owners on top of their compliance. If we could have a more balanced GST regime, in time the sector will be able to create both beneficial business opportunities for consumers.

There needs to be a constant conversation between the government and the restaurant associations to be able to navigate challenges. Through more flexible and business-friendly policies in GST, the sector could achieve sustained growth, create better guest experiences, and increase the contributions towards the overall Indian economy.

Impact on Consumers

Cost-efficient meals at smaller businesses - Casual dining or quick-service restaurants are more affordable, thanks to a flat tax rate of 5% with no hidden services charges. As a result, customers have gotten accustomed to these places more often.

Higher cost structures at premium outlets - Then comes fine-dining restaurants and hotel restaurant concepts, which charge the 18% slab and consequently pass the burden of higher taxes and loss of input tax credits on to the customer with inflated menus.

Reduced confusion in billing - Compared to the previous system of numerous ambiguous taxes before GST, customer's bills are much simpler today. The customer can now see how much they separately pay in tax and return confidence in the restaurant.

Behavioural changes – Customers prefer casual or mid-tier options for regular meals and will only keep the fine dining experience for special occasions given the cost of fine dining under GST.

GST Impact on Restaurants & Consumers

Category	GST Rate	With/Without ITC	Impact on Restaurants	Impact on Customers
Standalone Restaurants (AC/Non-AC)	5%	Without ITC	Cannot claim input tax credit; higher operating costs.	Lower tax but possible menu price hikes.
Restaurants in Luxury Hotels	18%	With ITC	Can claim ITC, but overall higher compliance burden.	Higher bills, considered premium dining.
Food Delivery (Zomato/Swiggy, etc.)	5%	Without ITC	GST collected & remitted by aggregator, not restaurant.	Transparent billing; same tax as dine-in
Pre-GST Era (VAT + Service Tax)	12%–22% (varied)	ITC available in parts	Multiple taxes, complicated compliance.	Confusing bills with multiple charges

Conclusion

The advent of GST has presented opportunities as well as challenges to the Indian restaurant sector. In terms of benefits, it has streamlined the taxation structure, provided transparency in terms of billing, and improved affordability of casual dining. However, the withdrawal of input tax credit (ITC) has, in most cases, increased the operational costs of restaurants. Because of this, the high end dining experience has become more expensive than it may otherwise have been, while smaller outlets have been the preferred option of consumers in this casual dining sector.

FAQs

1. What is the rate of GST that applies to restaurants in India?

Most restaurants have a GST rate of 5% without input tax credit. GST on restaurants in luxury hotels is 18% with input tax credit.

2. Can restaurants claim input tax credit in GST?

Standalone restaurants cannot claim input tax credit. Only restaurants that are located in hotels where the room tariff is above ₹7,500 can do so.

3. How has the advent of GST changed food delivery services?

Previously, restaurants were collecting GST on all deliveries. With GST, aggregators like Zomato and Swiggy collect and file & pay GST directly to the government.

4. Has GST decreased the cost of dining out?

For smaller restaurants, yes, and especially true now as they operate with a uniform 5% GST. Fine-dining restaurants have generally raised their price point to offset losses on input tax credits.