What is VAT for restaurants?
Before the implementation of GST, a close look at any bill or invoice would often reveal a variety of taxes and charges levied on the customer. This was a little complicated and confusing for most people involved. A visit to a café in the neighborhood could lead to a bill that any of us would analyze at length and wonder where exactly our money was going.
Let’s see the different kinds of taxes that were commonly charged by restaurants.
Firstly, there used to be a service tax. This is a kind of tax that was collected by the central government regarding the provision of specific services to consumers. It was charged to customers and then paid by the service provider to the government. It was a uniform tax that prevailed all over India, apart from the state of Jammu and Kashmir. It was levied on many other services apart from restaurants, including travel agencies, chartered accountants, banks, architectural services and so on.
Generally, a restaurant has services such as air conditioning, servers, doormen and attendants that it provides to customers- all of this falls under the domain of additional services. This was a change that was introduced in the 2012 budget.
The rate of service tax was 14% along with 0.5% of Swachh Bharat Cess too. From 1 June 2016, a Krishi Kalyan Cess of 0.5% was introduced, thus bringing the total sum of the rate to 15%. Normally, service tax had to be imposed on 40% of the value of the bill and not the entire bill.So the net Swachh Bharat Cess and Krishi Kalyan cess becomes 0.2% each (40% of 0.5%). 40% of the bill is considered the standard expense for services while the rest, which is 60%, is considered the raw material for food and drinks provided to the customer.
This led to the service tax coming to be 5.8% of the entire sum of the bill, which was subsequently rounded off to 6% from June 2016.
Image source: Economic Times
Secondly, there would also be a service charge. On the one hand, service tax is a levy to the central government. On the other hand, the service charge is the amount that goes to the waiters. Fine dining restaurants and posh eateries or clubs tend to add the service charge to their bills with the primary goal of ensuring that their staff receives tips for having served customers. This service charge is received by all the waiters and other staff in equal parts. Service charges can range from 4%-10% of the entire bill.
Thirdly, VAT or Value Added Tax was levied on items that are sold in a processed or improved manner. This means that there is a certain value that is added to an item before it is sold to the consumers. VAT could be anywhere between 5 – 20% for a restaurant.
VAT being replaced by GST
GST or Goods and Services Tax that came into effect in 2017 subsumed 12 indirect taxes and 22 cesses that are offered at different rates all over India. After this change, the service charge became a charge that a restaurant may levy at its own discretion. But restaurants are not legally bound to enforce any such charges.
The aim of introducing GST was to eliminate the cascading effect of taxes on the economy, which exist when there are taxes levied on a single product at every step of its sale. The tax is charged on a value that already takes into account the tax that had been paid by the previous buyer, making the final consumer pay a lot more than necessary.
VAT used charges along multiple stages of production, distribution, and sale. This meant that it could not be charged by a restaurant for bottled water or packaged food but it could be levied on food or drinks that were made from scratch in the restaurant itself.
Service Tax and Value Added Tax were also subsumed under GST.
Key Differences between Restaurant VAT and GST
With the advent of GST, operations have become much smoother for restaurants. When it comes to VAT, there is a cascading effect of taxes. However, GST is the solution for this as there is a single tax levied.
There are also different VAT rates in various states. Many laws for VAT exist across state boundaries. But with GST, there is one simple rate and law that restaurants have to make sure they adhere to.
It was also much more difficult to figure out the processes of accounting for VAT rates and other charges in a restaurant. However, the whole procedure is much simpler now. There are lesser compliances that restaurants have to put up with.
With VAT, only the state government would receive the whole share of tax. But the GST is a destination-based tax and it is distributed between the Central Government and the State Governments under the components of Central GST (CGST) and State GST (SGST).
GST has reduced the indirect and redundant taxes that were formerly paid by the taxpayers.
When GST was first introduced, there were three different slabs that a restaurant could fall in. For instance, if a restaurant did not have any air conditioning, it was charged 12%. If it had air conditioning or a liquor license, it was charged 18%. And for restaurants in 5-star hotels, the GST rate was a whopping 28%.
However, this changed in November 2017. The GST council decided to set a uniform tax rate of a mere 5% for all restaurants, regardless of whether they had air conditioning or liquor licenses. From May 2018, the same began to apply to food delivery businesses and takeaway too.
Kinds of Restaurants that need to pay VAT
If you run a restaurant which doesn’t serve alcohol, you only have to worry about GST. However, if you have a liquor license and do serve alcohol in your restaurant, it is a little more complicated.
The Goods and Services Tax does not include liquor. This means that if you have a customer who orders food and alcoholic drinks in your restaurant, the two kinds of items will be taxed differently. Depending on which state or union territory your restaurant is located at, this rate will differ too.
VAT, along with other applicable state taxes such as excise duty will be applicable on the alcohol portion of the bill only, and not the food. GST will be applied to the food at usual rates and alcohol will be charged with VAT. Thus, you need to set different tax rates in your point of sale system to ensure that no errors are made.
Let’s say that a customer in a restaurant has a food bill of Rs. 1000, and an alcohol bill of Rs. 700. GST will be charged on Rs. 1000 and VAT, along with other state taxes (if needed), will be charged on Rs. 700.
If you are wondering why this is the case and why there isn’t a single uniform rate charged on liquor all across India, it is because different states have different taxation methods on liquor. It comes under the ambit of the state governments and not under the Central government.
All the states and union territories have their own rules and regulations as well as taxation policies for liquor. For instance, states such as Gujarat have banned all trade and consumption of liquor. Other states such as Tamil Nadu have a state monopoly on alcohol trade altogether. Union territories like Pondicherry offer alcohol at extremely cheap rates to people.
Hence, these state rules and regulations need to be taken into account by every restaurant, depending on their location.
How much VAT do restaurants need to pay?
When it comes to Value Added Tax, different state laws prevail all over our country. It ranges between 5% and 20%. For instance, the VAT that is levied on restaurant bills in Karnataka is 14.5% while it is 12.5% in Maharashtra. If you plan to open a restaurant and serve alcohol there too, you must first get familiar with the state laws around VAT as well as alcohol trade and consumption. After this, you can go on to acquire a liquor license and then provide services to customers and tax them accordingly.
Since the Goods and Services Tax came about in India, it has brought considerable changes in the food and restaurant industry. Although it has taken time to get used to the new rules and regulations, it does ultimately make restaurant operations simpler and quicker. Stay up to date with any changes that might come up and make sure that your restaurant abides by the state as well as central laws. This way, you don’t have to worry too much about having to pay any fines or penalties. You can focus on providing the best possible services to your customers.