Goods and Service Tax

Input Tax Credit for Restaurants

calendar08 May, 2020
timeReading Time: 7 Minutes
Input Tax Credit for Restaurants

In India, Goods and Services Tax and Input Tax Credit for restaurants are the highlights of the intricate restaurant Tax system. If you are running a restaurant business in the national boundaries of India, you should understand the significance of GST and Input Tax Credit in India, along with the functioning of GST in the restaurant industry.

At an initial level, you need to keep your eyes on GST and try to comprehend how it is affecting the restaurant business, and then the next thing to take into consideration is Input Tax Credit (ITC). As Input Tax Credit for restaurants keeps changing, we are bringing to you the revised updates after covering the claiming process.

Input Tax Credit for Restaurants – Claiming Process

Claiming the Input Tax Credit for restaurants is only possible if you get registered under the GST wing via conventional means. It’s mandatory to have GST compliant under the relevant tax invoices. All the documents that you have produced will pass through the verification process.

  • To take the Input Tax Credit for restaurants, follow the provisions of getting your business registered under Goods and Services Tax.
  • You need to visit the online portal, and there you can make the request for Input Tax Credit for restaurants.
  • Leaving the list of exempted items like destroyed and misplaced goods, beverages, food, and other items, Input Tax Credit can be claimed on all goods as well as services.
  • Claim ITC within a year taxes gets paid, backed by the required documents.
  • When it comes to using for personal use, ITC is not applicable to goods and services as well.
  • The type of business that you are engaged in is providing a base for the due date for filing a return.

Updates on GST and Input Tax Credit for Restaurants

The latest changes in Goods and Service Tax indicate that only those restaurants that fall into the ambit of 18% GST slab can proceed further and claim for the input tax credit on its monthly returns. Another side of the story is restaurants who fall into the 5% GST slab cannot think of claiming Input Tax Credit for restaurants on its monthly returns. If the annual turnover of a restaurant exceeds 100 Lakhs, won’t be getting permission to take advantage of this benefit. Restaurants inside 5-star hotels and outdoor catering can claim the ITC.

The Indian government has withdrawn the facility of Input Tax Credit from the restaurants as they realized that diners weren’t getting any advantage from the restaurants’ end. Even no reduction in prices by restaurants drew the attention of the government since the government felt that they hadn’t met their goals of reduction in prices for the welfare of consumers.

The Basic Concept of Input Tax Credit

Input Tax Credit is a tax reduction mechanism in which taxes paid on inputs get reduced from the taxes paid on output.

Are you getting confused with this mechanism theory? Wait, and let me make things crispy and straightforward for you.

Suppose that you are a restaurant owner, and you are running a restaurant. The tax payable on the food item that you provide is 850 INR. 650 INR is the tax that you pay on the purchase of raw materials. Input Tax Credit rule looks for such kind of claims. 200 INR is your final applicable Goods and Service Tax.

You might have got the point. Well, we hope so.

Aftermath of Input Tax Credit Facility Removal

Due to the discarding of the input tax credit facility from the restaurants in India, there is an acceleration in the operating costs of the restaurants. Restaurants were at sea, and they started raising the prices of food items in the menu for recovering the losses that they are facing due to the withdrawal of input tax credit for restaurants in India. Well-established brands like KFC, Starbucks have increased their base prices without making much delay so that they can coat the portion of the raised cost.

Types of Restaurants and Get to Know whether they can Claim Input Tax Credit for Restaurants or Not

  • For stand-alone restaurants, the GST rate is 5% without an input tax credit.
  • For all restaurants (including AC and Non-AC, both Alcohol friendly and Non-alcoholic), the GST rate levied is 5% without an input tax credit.
  • For small-size restaurant operating inside hotels (Room tariff below 7500 Rs), the GST rate applicable is 5% without ITC.
  • For restaurants inside the five-star hotel or other A+ hotels (Room tariff exceeding 7500 Rs), the GST rate applicable is 18% without an input tax credit.
  • For the outdoor catering service, the GST rate levied is 18% without ITC.

Revision in Input Tax Credit Rules made Restaurant Owners to Ace up their Sleeves.

In order to face off against input tax credit strike down, restaurants are looking for a new morning of hope in international countries. By doing this, restaurateurs will be able to expand their reach and would connect with more people and prove their mettle outside Indian borders.

Since opening more chains are not in store, restaurants will be craving for expansion through online medium. It’s a way to spread the positive vibes regarding their brand, and also it will do wonders for their brand value.

With the introduction of rapidly emerging technological concepts like ‘cloud kitchens,’ restaurateurs would be endeavoring to save the business costs along with bringing improvement in operational efficiency.

To claim Input Tax Credit for restaurants, opening restaurants in five-star hotels is a clever idea.

Read our article:Who needs FSSAI Registration? Is FSSAI Registration Mandatory?

And here’s how the industry Reacted

Under the reworked goods and services tax regime, the government forsook input tax credit for restaurants. In one of an interview, chief executive of First Fiddle Restaurants, Priyanka Sukhija, told that after input tax credit gets scrabbed, people like her are suffering 23-30% losses in EBITDA. Also, they are planning to spread their wings across the Indian boundaries and establish their outlets in foreign countries. Most of the people from the same field came to a common point that with denial of ITC, even survival of margin has become a challenging task. Increase in capital expenditure and a decrease in margins is a matter of concern.

Co-founder of Cafe Delhi Heights, Sharad Batra told that denial of input tax credit facility is giving wounds to the industry, and thus, the industry is suffering terribly. However, The Federation of Hotels and Restaurants Associations of India (FHRAI)[1] embraced the newly introduced GST mechanism and briefed that advantages of this regime are beyond the customers’ zone, and it will be simplifying the things for restaurants owners as well by bringing flexibility in the functionality part.

Members associated with the National Restaurant Association of India (NRAI) were not happy with the revision in input tax credit for restaurants. After imposing GST, the government encircles the NRAI members with questions related to the high menu prices that they’ve set. The NRAI clarified that input tax credit withdrawal would kill all the scope for growth and development and also would increase the burden of capital expenditure. Furthermore, they added that the GST paid on rent along with electrical appliances was higher than ever, and unavailability of input tax credit facility is a matter of injustice for them. The government said that all the arguments were baseless and unreasonable, and they said no for reviewing the matter.

Compliance is a Requisite

Tax authorities have prescribed specific rules for operating a business, and those who are violating the rules given by tax authorities are not doing the right thing. Many popular chains like Subway and Domino’s got entangled into trouble with the National Anti-Profiteering Authority of India (NAA) for not bringing the menu prices down in consonance with the new tax system.

GST has been received well by many players, while some of them were not happy at all. In the market, most of the players have gained a lot of advantage due to its introduction, whereas few of them are still waiting to adapt their strategies according to this system.

We are living in a time frame in which by putting minimum efforts, restaurants can get appropriately managed. All the restaurants must follow the rules and regulations laid down by our government, and those who have not adjusted themselves with this system should try to get the things right considering the future prospects.

Points of Concern over the Misuse of Input Tax Credit Facility

Many people in our country have lost themselves in the unscrupulous business. Chances are likely to be high that such people would make an attempt to generate fake invoices in order to claim tax benefits and take advantage of it.

As per the present scheme, provisions for real-time matching of input tax credit claims with the taxes paid by suppliers of inputs don’t exist.

Due to the considerable time gap between the taxes paid by suppliers, and input tax credit claim, the margin of possibility related to fake invoice creation to claim ITC by any means is high.

When can a Taxable Person think about Availing Input Tax Credit under GST?

  • If one applies for goods and service tax registration voluntarily.

If one applies for GST registration willingly, one can avail input tax credit on inputs as well as inputs contained in goods of different kinds like finished or semi-finished goods available in stock one day before getting provided with GST registration.

  • If one applies for registration under GST, on being liable to register

When one attempt for registration under GST on growing liable to get registered, one can avail Input Tax Credit on inputs along with inputs stored in finished and semi-finished goods, on the prior day of becoming liable to pay the tax. Nevertheless, this can happen in that case when one applies for registration in the time frame of 30 days from that date of becoming liable to register and has been provided with registration.

  • When sale/lease/amalgamation/merger/transfer of business takes place

In any of the above-mentioned cases, specific provision is there for liabilities transfer, and one can go on transferring unutilized input tax credit to the leased, sold, amalgamated, merged as well as transferred business.

  • If goods get acquired in installments or lots

If goods get received in lots or installments, one can think for availing ITC, – just upon the installment or last lot receipt.

  • If one moves away from composition scheme towards the regular dealership

When aggravate turnover crosses the 50 Lakh mark, and when one is registered under composition scheme, one has to migrate from composition scheme into the direction of the regular dealership. When one shifts from the composition scheme and become a regular dealer, one has got the right to avail input tax credit on inputs, capital goods and inputs contained in semi-finished as well as finished goods, on the day prior to the date on which one get on becoming liable to pay tax.

  • When goods and services are partly used for business and other purposes as well

In this condition, one can avail input tax credit- but only on that portion that was used for business purpose.

  • When GST exempted goods or services become taxable

When those goods or services that have got exempted from GST becomes taxable, one can avail input tax credit for sure on the day prior to that day when supply becomes taxable-

  1. Capital goods employed for the exempt supply. The credit on capital goods will lessen in percentage form, which will get noticed too.
  2. Exempt supply related inputs in stock and inputs included in finished and semi-finished goods in stock.
  • When goods and services get partially used for taxable supplies and partly for exempt supplies as well

In this condition, one can go for availing ITC only on the taxable supplies part. No ITC will be allowed on the exempt supplies portion.

Take Away

Not all restaurant owners are fortunate enough to take advantage of the input tax credit for restaurant. Those restaurants that are eligible to get the input tax credit facility must get registered under the GST wing. It’s also mandatory that their documents must pass the verification process. Since the denial of the input tax credit does not satisfy one and all, everyone involved in this sector should adapt themselves as per the demand of the situation.

Read our article:GST Return Filing Procedure – Types of GST Returns, Due Date and Penalty

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