Input Tax Credit And What That Means for Your Restaurant

Goods and Service Tax and Input Tax Credit are two features of India’s elaborate restaurant tax system.

If you are a restaurant you simply cannot ignore GST and the way it operates in the restaurant industry. Once you have a fair idea about the many ways in which GST affects your restaurant business, the next the thing to look at is the Input Tax Credit (ITC).

Input Credit Tax for restaurants underwent some major changes under the revised tax regime, in November 2017. Let’s get you updated. 

What is Input Tax Credit?

Input Tax Credit, commonly known as ITC, is the credit that can be claimed on the GST paid at the time of output.

Complicated? Stay with me.

In theory, the taxes already paid on your purchases (input) can be reduced in the GST paid at the time of sale (output).

Let’s say you are a restaurant, and the tax payable on your final product (food item) is 550 INR. The tax on your purchase (raw materials), let’s say is 400 INR. This could be claimed under the Input Tax Credit rule. Your final GST applicable is only 150 INR.

So what has changed?

The new Input Tax Credit on restaurants

While the GST on all restaurants has come straight down to 5% from 18%, most restaurants cannot claim the Input Tax Credit anymore. For example, restaurants that have an annual turnover of more than 100 lakhs are not allowed this benefit anymore. Now, only outdoor catering and restaurants that are located inside five-star hotels can claim the Input Tax Credits. 

Which restaurant types can claim the Input Tax Credit?

Type of Restaurant GST Rate applicable in 2019
All restaurants (AC and Non-AC, irrespective of alcohol served) 5% without ITC
Takeaway 5% without ITC
Restaurants inside hotels (Room tariff less than 7500 INR) 5% without ITC
Restaurants inside hotels (Room tariff more than 7500 INR) 18% with ITC
Outdoor Catering 18% with ITC

How to claim the Input Tax Credit for restaurants

The Input Tax Credit can be claimed if you’re officially registered under the GST. For doing so you need to have the necessary tax invoices that are GST compliant. The documents produced by you will then go through a process of verification.

  • You need to get your business registered under GST in order to take the Input Tax Credit.
  • All the Input Credit Tax requests can be made on the online portal.
  • ITC can be claimed on all goods and services except for those mentioned under the list of exemptions like food and beverages, destroyed and lost goods, etc.
  • It can be taken within a year of paying those taxes with the required documents.
  • The Input Tax Credit is not applicable to goods and services for personal use.
  • The due date for filing a return differs depending on the kind of business you’re running.

Restaurants are now looking for alternatives ever since the Income Tax Credit rules were revised

  • More restaurants are focusing on online expansion as opening more chains is not on the cards for them.
  • Moving their restaurants abroad is another way to counter the ITC strike down.  
  • Opening restaurants in five-star hotels would help in claiming the ITC.
  • New technological concepts like Cloud Kitchens are serving the purpose well by not just reducing the expenses but also the time spent in various restaurant functions.

How the industry reacted to the revision in Input Tax Credit rules

The Federation of Hotels & Restaurants Association of India (FHRAI) welcomed the new GST mechanism and stated that the benefits of this new regime were not just limited to the customers but also the restaurant owners, simplifying their functioning at large. 

The new rates were consumer pocket-friendly but no so much for the restaurants. Without the Input Tax Credit on most restaurants, many chains faced a certain amount of financial pressure post GST.

Input Tax Credit
Restaurants increase menu prices

Members of the National Restaurant Association of India (NRAI),  that didn’t quite agree with this new system. Shortly after the GST imposition, the government questioned the members of the NRAI about the high menu prices by them. The NRAI argued that the withdrawal of ITC would reflect on their capital expenditure and would leave no scope for development. The GST paid on the electrical appliances and even rent was high and the denial of Input Tax Credit for these was unfair. The government said that their argument was unjustified and denied to review the matter.

Compliance is a must

Not running your business according to the rules laid down by the tax authorities is not ideal. It will make your restaurant famous for all the wrong reasons.

Many QSR chains like Domino’s and Subway ran into trouble with the National Anti-Profiteering Authority of India (NAA) for not reducing the prices on the menu in accordance with the new tax system.  

GST has been both criticized and appreciated by different industries. It has financially helped a lot of sectors while many others are still struggling to get accustomed to this system. In today’s time and age restaurants can be managed effectively with minimum efforts. Using different tools would help you explore the different aspects of running and growing your business.

Input Tax Credit And What That Means for Your Restaurant
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Devyani Singh

Devyani Singh

Devyani is a content marketer at LimeTray. Often seen with her earphones on listening to 90s rock and Jazz or reading Harry Potter all over again. She's extremely fascinated by trees and can be seen photographing them every now and then. She is reachable at marketing@limetray.com.