Restaurants agree to lower GST rate, but menu prices may rise

Restaurants in India, on Wednesday, complied with lower Goods and Services Tax (GST) rate of five percent after initial reluctance to trim prices.

The GST Council had slashed the rates for all restaurants to five percent, except the ones located within hotels with tariffs of Rs 7,500 and above and outdoor catering. Earlier, the tax rate was 18 percent for air-conditioned restaurants and 12 percent for non-air-conditioned eateries.

However, some members of the National Restaurants Association of India (NRAI) disagreed with Centre's decision to withdraw input tax credit (ITC) and said that the menu prices may rise by six percent due to withdrawal of the benefit, the Times of India reported.

The input tax credit is important to the restaurants as they could claim an offset on the tax they pay on inputs (like raw materials) against the tax on the end products. It accounts for three-four percent of profit of a restaurant, according to the estimates by Federation of Hotels and Restaurants Association.

Hence removing the input tax credit from the system, restaurants will likely increase the menu prices to adjust the tax they would be paying for buying raw materials.

But despite, menu prices might increase by 10 percent, the consumers are still expected to benefit as they had to pay higher tax of 18 percent earlier. Further, according to rating agency Icra, eating out should get seven-13 percent cheaper for the people.

"The new GST rate is definitely beneficial for the consumer. And there is the feel-good factor of lower GST. So, the propensity of eating out will be higher," said Rahul Singh, vice-president, National Restaurant Association of India.

The GST Council had also decided to slash rates for various fast moving consumer goods (FMCG) products like washing powder, shampoo, chocolates and nutrition drinks last week, which started with an immediate effect on Wednesday.

On Thursday, Asian News International (ANI) also said in a tweet that the cabinet approved the creation of National Anti-profiteering Authority (NAA) under GST, to ensure benefits of reduction in the new tax rates are passed on to the consumers.