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The Govt Can't Do Much, If Restaurants Don't Pass on Benefits of Lower GST

Nov 20, 2017

28

Dear Reader,

If you are on WhatsApp, I am sure you would have got a forward by now, which basically shows that eating out at a restaurant hasn't become cheap, after the Goods and Services Tax (GST) was cut to 5 per cent.

In fact, there has been a lot of hungama (for the lack of a better word) around this issue, with people demanding that the government take action against the restaurants. Let's try and understand this issue in detail.

The GST on restaurant bills was recently cut to 5 per cent. Earlier it was 18 per cent or 12 per cent depending on whether the restaurant was air-conditioned or not. Hence, the expectation was that the cost of eating out will come down, with the rate of tax being slashed. Nevertheless, nothing of that sort has happened in many cases. Hence, people have taken to WhatsApp, Twitter and Facebook to highlight this issue.

Before going further, it is important to understand that there is one basic difference between the new GST rate and the earlier GST rates of eating in a restaurant.

The new rate is a flat tax of 5 per cent (and that makes me wonder as to why is it still called GST). This means that no input tax credit is allowed. In case of earlier rates, the tax was a value added tax i.e. input tax credit was allowed. This basically meant that restaurants could claim a set off for the goods and services tax they had paid on their inputs. The inputs in this could be tax paid on dairy products, meat, vegetables etc.

But input tax credit is not allowed now. Hence, the new 5 per cent GST is not a value added tax. It's just another tax.

Now with the input tax credit not allowed, some restaurants are claiming that the cost of running their business has gone up. This has meant that the pre-GST price of the food products they sell, needs to go up, and in the process, there is not much of a difference in the end price that the consumer is paying for the food products.

McDonald's India says that with the input tax credit being withdrawn their operating costs have gone up by 10-12 percent. And after taking this increase in cost into account, the effective tax benefit due the lower tax rate of 5 per cent, "would have been less than a per cent." As the Business Today magazine puts it: "A few restaurant owners... pegged a spike between 7 per cent and 10 per cent in costs."

The fact that input tax credit is no longer available, hence, there can't be much of a difference in the final price paid by the consumer now, as against earlier, is a perfectly valid argument to offer, on parts of the restaurants.

This hasn't gone down well with many people and they have taken to the social media urging the government to take action. They are not convinced about the validity of the input tax credit argument. They feel that this is just an excuse on part of restaurants not to cut prices and increase their profitability. Hence, the government needs to investigate and take action.

The trouble is that the capacity of the Indian government to do anything is fairly limited, let alone going around investigating so many restaurants. Also, it has other more important things to do. Given this, it is not in a position to check the books of accounts of the large number of restaurants. And more than that, it should not even try to entertain any thought of doing this.

What I am saying is that if a restaurant chooses not to decrease price now, it can always offer this explanation of lack of availability of input tax credit, and there is no way to contest the explanation. The government cannot go into the accounts of each and every restaurant in the country in order to establish whether the explanation holds in their case or not. Of course, many restaurants obviously will look at this as an opportunity to make more money and which is precisely what they will do. There is no denying that.

So, what is the solution to this? If you as a consumer feel a restaurant is expensive simply don't go there. If enough people do that the restaurant will automatically have to cut prices. If people continue going, then the higher price doesn't really matter to them and they shouldn't be really complaining.

Also, these are the unseen effects of starting with high tax rates. The trouble with bad economic policy (while GST is not bad policy per se, but its implementation clearly is) is that its ill effects are not always clear from the very beginning. This is now starting to come out in case of GST.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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13 Responses to "The Govt Can't Do Much, If Restaurants Don't Pass on Benefits of Lower GST"

Jayant Gharpure

Nov 21, 2017

9403186425
to make the Article meaning ful, it is necessary to know what was tax regim before GST came along. was input credit allowed before? what rate change effect on inputs after GST.Most of resrto.s did not charge ST/VAT separately in bill

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DJ

Nov 20, 2017

80% ofraw material for restaurant is Agri commodities on which GST was anyway zero!

Like (1)

Sumant Bhargava

Nov 20, 2017

Really Mr. Kaul? Restaurants have no benefits from this change of GST. Would suggest you to please understand the GST math for restaurants first.

Like (1)

RAJESH GOEL

Nov 20, 2017

Dear Vivek
Absolutely true . Tax on restaurants can not be classified and termed as GST . If resturaunts increases the cost .People should decide whether to eat or not and at least raise their objection/protest to same . Let Consumer decide what it wants .
regards
RAJESH GOEL

Like (1)

Prasad T.R.M

Nov 20, 2017

This is just an eyewash and mere intention is not enough when the govt.does not have a method to implement effectively!going even deeper , does this not amount to tax evasion & black money generation and the claim that it's fighting against these from roof tops? Even the case of investigation of lakhs of huge old currency deposits made in the banks is farce as the govt.does not have the machinery to investigate in ones lifetime!

Like (1)

Babu

Nov 20, 2017

first time when GST of 18/12 was implemented with input tax credit, restaurants increased prices stating that rates are high. Now that the GST is 5% without input tax credit, expectation was that the increases done earlier would be rolled back. Considering the increase done in the first time there is no justification to increase it again this time citing no input tax credit.

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Amol Karkhanis

Nov 20, 2017

Dear Mr. Kaul,
Earlier the hotel and restaurant rates were inclusive of 12.5% VAT and 5.6% Service Tax. When GST was implemented, the hotelier simply added GST on the previous price making it costlier for common people. However, when GST was reduced to 5%, they forwarded the reason of No Input Credit and again increased the price. They are sheerly deceiving their customers under flimsy context. You as a learned person should understand and raise voice rather tjan sounding helpless and supporting price rise.

Like (1)

V Thiruvalluvan

Nov 20, 2017

Only one thing becomes clear. The persons who are at the helms of the affair is not knowing / not bothered to know how really the people are living. Why somebody has not implemented for so long? May be they know the intricacies and they can foresee how different sections of the people will get affected / benefit (will react etc). The only people who get / will get benefited by all the programme of this government is corporates and high net worth individuals. This is also getting reflected in the result (moody's upgrade and WMF upgrade) which are of no use to the common man. May be it is detriment also to him and in larger context to the majority people of the country. Down the line after a few years we may end up with US& Europe where 90% of the wealth is with 1% of the people, if the same government continues with the similar policies.

Like (1)

Sanjay Gulabani

Nov 20, 2017

I am not an economist, so I may be fairly wrong in my assumptions - but I do have one question. Let us say that the bill in the Pre-GST Era was Rs.500/-. Now because at that time, there was neither GST nor any input tax credits, it must include both - the tax paid at input and tax collected (and paid to Govt) at output. Currently, the GST is 5%. If we exclude the interim period of a few months from July to November, currently with GST in effect, input is taxed at 18% and output at 5% which is lower than the taxes in the Pre-GST era - so shouldn't the overall bill reduce INSPITE of there being no input tax credit?

Like (1)

Amit Abrol

Nov 20, 2017

what do you mean "The Govt Can't Do Much, If Restaurants Don't Pass on Benefits of Lower GST"?

Is the govt's job only to impose taxes & levies, wash their hands of proper implementation?
What ERA are we headed into? Ridiculous excuses for total lack of accountability!

Get off your high chairs & understand the reasoning for the all round disgruntlement - you cant just wash your hands off it! Business sentiment is so low, established businesses contemplating moving (at least the ones who can).

Disgusted at the absolute lack of apathy, put off by this sickening attitude - time for TALK well over guys. Shape up or ship out!


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