GST change might hit growth of restaurant chains

Amid the fuss about revision of eatery menus in line with the new goods and services tax (GST) rate, the restaurant chain sector is staring at another disruption. The abolition of input tax credit (ITC) has raised concerns about growth and opening of new franchise outlets.

Last month the government brought down the GST rate for restaurants to five per cent, from 18 per cent. However, removal of ITC has minimised the effective reduction in the tax rate. While, the debate so far has been on realignment in prices of food and beverages (F&B), the new norms also raise the effective rate of tax on fixed costs like royalties, franchise fees and all other transactions. While consumers are charged five per cent GST on food bills, the GST on royalty and franchise fee is 18 per cent.

Without the ITC facility, says the National Restaurant Association of India (NRAI), its members would pay up to 2.7 per cent more. “This has impacted growth plans, as royalties and franchise fees go up significantly. We see an impact on opening of new restaurants due to this,” said Karan Tanna, founder and chief executive at Yellow Tie Hospitality, a franchise management company operating in the F&B sector.

According to Vikram Bakshi, managing director, Connaught Plaza Restaurants, the move goes against the essence of GST. “We will not get ITC on the tax we pay on any transactions, including royalties. This escalates fixed cost.”

The ~20,000-crore restaurant chain sector is currently growing at 22 per cent annually. Three standard models of business are used. One is a company-owned outlet model, another is through a joint venture between a company and its franchise partner, and the master franchise model.

The latter is gaining momentum heavily as influx of multinational restaurant chains grow, where royalty and franchise fees paid by outlet owners form the chunk of the brand-owning companies’ revenue. While royalties range from eight to 20 per cent, an escalation of up to three percent due to higher tax is expected to hamper the business model.

This has also led restaurant chain owners and franchise partners to go back to the drawing board. By sector estimates, opening of new restaurants could go down by 10-15 per cent due to higher set-up costs.

Increase in incidence of noncompliance by various stakeholders is another concern. “With ITC now withdrawn and the tax chain broken, we feel compliance from vendors will have to be watched,” said Rahul Singh, president of NRAI, and founder and chief executive at BTB Marketing that runs The Beer Café chain. Compliance might go down substantially as "restaurants now have a straightline GST, which they charge in the bill and submit”.

However, the new norms also bring some good news for small and unorganised entities. Earlier, some of them had been left out by the large chains due to inability to comply with filing of returns. “This (the change) will definitely allow restaurants of every size to comply,” Singh said.