When the Goods and Services Tax (GST) Council announced a sharp reduction in the tax rate for restaurants to 5% on November 10, consumers expected a commensurate fall in their bills.
Previously, both consumers and restaurant owners complained of the earlier steep tax rates of 18% for establishments with air-conditioning, and 12% for those without.
This has not happened, and in fact, certain restaurants have raised the prices on their menus. Based on specific complaints issued by consumers, reports indicate that the government is looking to penalise restaurants “if profiteering is established”.
Earlier this week, the government had given its approval for the establishment of the National Anti-Profiteering Authority, which seeks to ensure that consumers are protected from arbitrary attempts at raising prices in the name of the GST.
Why have certain restaurants jacked up the prices on their menus? The answer, according to the National Restaurants Association of India (NRAI), lies in the government’s decision to withdraw the provisions for input tax credit in the restaurant business.
The NRAI estimates that the GST Council’s decision to do away with input tax credit will raise menu prices 6-7%. Those establishments that previously attracted a GST rate of 18% on commercial rents will be hit hardest.
Here is a simple explanation of input tax credit. “Under input tax credit, businesses can claim an offset on the tax they pay on inputs against the tax they pay to the government on final products,” says a recent report in Scroll.in. “But after Friday’s (November 10) decision, a restaurant is no longer entitled to claim input tax credit on the food items it uses as raw material.”
Speaking to TOI, however, a senior official in the Ministry of Finance, argues, “If the impact of the withdrawal of input tax credit is a sharp increase, they should have also reduced prices by a similar margin when GST was introduced in July. It is a fit case of anti-profiteering action.”
In other words, the government felt that restaurants weren’t passing on the gains accruing from the tax credit available on inputs and commercial rent to consumers in the form of lower menu prices.