The GST regime of indirect taxation has subsumed most of the indirect taxes levied on the sale

and purchase of goods and services in India. The price of numerous commodities and services
have been affected due to the multiple indirect taxes imposed. When it comes to the restaurant
business, the rate of GST on restaurants has been a debatable issue. Under the pre-GST regime,
the bill of the restaurant included VAT, Services Tax and Service Charge. The particulars of a
restaurant bill before GST regime were as follows:

Price of food Item: The price stated in the Restaurant’s Menu card is the price on which the
different taxes were calculated.

VAT:  The Indirect tax levied on food items ordered.

Service Tax: The indirect tax levied on services provided by restaurants.

Service Charge: This is not an indirect tax, but a charge levied by restaurants over and above
Service Tax. The amount of Service Charge charged by the restaurant was not included in tax
collected by the government.

Rate of GST on Restaurant Bills

Type of Restaurants Tax Rate

5%  without
Restaurants (Stand Alone) Input Tax
Credit
5%  without
Restaurant being a part of a Hotel (where the declared tariff of the
Input Tax
accommodation is not exceeding Rupees 7500)
Credit
Restaurant being a part of a Hotel (where the declared tariff of the 18% with
accommodation exceeds Rupees 7500) Input Tax
 Credit
5%  without
Regular Catering at say Company premises Input Tax
Credit
18% with
Outdoor catering service Input Tax
Credit

The restaurant business is eligible to opt composition scheme under the GST law. However, the
restaurant is required to follow the prescribed composition GST rules.

The rate at which restaurants are required to pay GST is fixed at a concessional rate of 5% which
is to be levied on the turnover subject to the following restrictions:

 The Turnover of the restaurant should not exceed Rs 1.5 Crores (Rupees 150 lakhs).
However, this limit Rupees 1 Crore for special category States.
 The restaurant should not be engaged in any services other than restaurant subject to
certain exemptions.
 The restaurant can’t be engaged in the interstate supply of goods
 The restaurant can’t supply any items exempt under GST.
 The restaurant can’t supply goods through an e-commerce operator
 The restaurant can’t avail any ITC (Input Tax Credit)
 The restaurant can’t collect taxes from the customer

In addition to this the Restaurant opting for Composition Scheme is required to:

 mention the words “composition taxable person, not eligible to collect tax” on the bill of
supply.
 mention the words ‘composition taxable person’ on every notice or signboard at their
place of business or additional place of business.

Regular Tax Payer V/s Composition dealer

Particulars Regular Scheme Composite Scheme

Threshold limit – Rupees. Threshold limit – Rupees. 150
Registration
20 Lakhs lakhs (1.5 Cr)
No restriction on supply of
Business Territory Restricted to Intra-State Supply
goods or services
Switching to Once the limit is crossed,
The Compliance procedure
Composition from registration under regular
is high
Regular or Vice versa provisions is compulsory
Input tax credit (ITC) Eligible Not Eligible to avail ITC
Supplier can supply goods Composition dealer cannot supply
Business through e-
through e-commerce goods through e-commerce
commerce operator
operator operator
 Eligible to collect tax from Cannot collect tax from the
Collection of Tax
the customer customer
Can issue a tax invoice for Instead of Tax Invoice can raise
Tax invoice
outward supply Bill of Supply
GST returns Monthly returns Quarterly returns
The term ‘Restaurant’ has not been defined under GST law. In common parlance, ‘restaurant’
can be understood as a place where people pay to sit and eat meals that are cooked and served
within the premises.

The taxability of the services provided by the restaurants and the scope of the term ‘restaurants’
have been elaborated under GST regime. It is no longer only a place where people go, sit and eat.
Various other terms such as canteen, mess, takeaways, catering, etc., have been incorporated in
restaurant services. Unlike Service Tax law, there are no restrictions on whether the restaurant
is an air conditioned one or non-air conditioned and whether it is serving alcohol or not.

GST Rates on Accomodation, Food & Beverage Services:

Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017, Serial No. 7 under
Heading No. 9963 (Accommodation, food and beverage services), prescribes the
following GST rates:-

Description Applicable GST

Rate

Food services provided by restaurants including takeaway facility 5% with No ITC

(both air-conditioned and non-air conditioned )

Any food/drink served at cafeteria/canteen/mess operating on 5% with No ITC

contract basis in office, industrial unit, or by any institution or by any
other person on basis of contractual agreement which is not event
based or occasional

Restaurant services provided by restaurants located within a hotel 5% with No ITC

featuring room tariff less than Rs. 7,500
 Restaurant services provided by restaurants located within a hotel 18%
featuring room tariff of Rs. 7,500 and above

Meals/food services provided by Indian Railways/IRCTC or their 5% with No ITC

licensees both in trains or at platforms

Food services in a premises arranged for organizing function along 18%

with renting of such premises

Food services at exhibition, events, conferences, outdoor & indoor 18%

functions that are event based or occasional in nature

Other Accommodation, food and beverage services 18%

Food ordered through e-commerce operator:

Cloud kitchens, delivery kitchens and or food delivery applications would be covered by the
definition of e-commerce operators. 

Most of these e-commerce operators enter into contracts with the restaurant owners and offer
restaurant search and delivery services through their website or mobile application. Customer
places order by using their website or apps. Aggregators are responsible to take customer order
from the restaurant premises and deliver the food to end consumer.

The entire transaction in relation to food ordered via e-commerce operator is divided into 2
parts:-
1. Food is delivered by the e-commerce operator’s hired/ contracted
delivery boy from restaurant premises to place of buyer. Bill of restaurant
is handed over to the buyer

- In this case GST charged by the restaurant will be rate of restaurant services, i.e., either 5% or
18% as the case may be.

2. Delivery fee charged by e-commerce operator from buyers

- E-commerce operator will charge GST at 18% from customers on delivery charges collected
from the customer and it shall not form part of restaurant services but would be classified under
HSN 9968, being a part of postal & courier services.

Given below is the summary of food ordered by A in Delhi through XYZ.com (e-commerce
operator):-

Particulars Amount
Burger ordered (1* 129) 129.00
Restaurant Handling Charges 29.00
Delivery Charge 16.00
GST – CGST 3.95

          - Delhi GST

  3.95
Promo Code: 40% Discount (51.60)
Total 130.30

The revolutionary indirect tax in India i.e. GST (Goods & Services Tax) rolled out last week on
the 1st of July, replacing a cascading system of taxes. It is set to change the face of Indian
Economy. The motive behind the implementation of GST was to make the tax structure simple
and administration easy. It will also help reduce the overall effective tax rate charged on many
goods and services.

How is it going to affect the overall restaurant industry is a question popping in most of the
restaurateur’s heads.

The Indian Restaurant industry is fragmented with 1.5 million eating outlets. As per NRAI’s
India Food Services Report 2016, the total food services market today stands at INR 3, 09, 110
crores and has grown at 7.7 % since the last report in 2013. This is projected to grow to INR 4,
98, 130 crores at a CAGR of 10% by 2021. In 2016 alone, the Indian restaurant sector created
direct employment for 5.8 million people and contributed a whopping INR 22, 400 crores by
way of taxes to the Indian economy. When it comes to the restaurant industry, the tax is
progressive – it’s likely to benefit the small restaurants and dhabas, but hamper 5-star restaurants
and hotels. 

TAX RATES:
FOOD:

The effective tax for the food served in restaurants was around 20.5% before GST.

The GST Council has fixed multiple rates on restaurants based on different variables like
turnovers, air-conditioned or not and other factors.

 SMALL RESTAURANTS: Restaurants with a turnover <Rs. 50 Lakh are placed in the tax bracket of
5 percent – these include street food vendors, neighboring eateries, local market stores and
dhabas.
 MEDIUM RESTAURANTS:
o Restaurants with a turnover > Rs. 50 lakh without ACs are taxed at 12 percent.
o Restaurants with a turnover of Rs. 50 Lakh+ AC facilities to the customers will pay 18
percent tax.
 LUXURY RESTAURANTS: The tax slab increases to 28 percent for luxury restaurants ( five-star
and seven-star hotels ).

ALCOHOL AND AERATED DRINKS:

 For alcohol, states don’t want to lose the significant revenue currently earned from state excise
duty. In many states, the revenue from state excise taxes imposed on alcohol brings in 25
percent of total revenue. For this reason, the state excise tax on alcohol has been kept out of
the constitutional mandate for levying GST.
 VAT on alcohol will be added as per the state figures.
  Many restaurants and bars are still charging the old tax rate on the total alcohol bill. They are
giving the same bill for food and alcohol with two different tax rates calculated i.e. GST and VAT
respectively.
 Aerated drinks come under the highest tax bracket of 28%, as they fall under the ambit of luxury
goods.

CAPITAL SIDE:
PROCUREMENT OF WORKING CAPITAL:

 Something to cheer about:  Under the current tax regime, restaurants do not get any option to
adjust the output service tax liability with the credit of input VAT. However, now both these
taxes will get merged into one tax – GST. Irrespective of goods and services, the credit of input
will be available for adjustment against the output liability. This will optimize the working capital
of restaurant owners.
 Something to be sad about:  Under the VAT regime, composition holders were not liable to pay
purchase tax on purchases made from unregistered persons. Under GST laws, the restaurant
owner shall be liable to pay tax on supplies from unregistered persons at full rate.
 Raw materials can be procured at subsidized rates from agriculturists and farmers at a single
stroke. Owners will not have to negotiate – taxes shall remain uniform throughout states thus
making the competition even. The overall cost of procuring goods will thus decrease
substantially.
 For many restaurants, procuring domestic inputs have become cheaper with the tax charged at
18% while imported inputs are charged at 28% and have become relatively more expensive.

PROCUREMENT OF FIXED CAPITAL:

 Something to cheer about: The supplier of restaurant services will be entitled to input tax rebate
on the inputs, capital goods and input services used by them in the course or expansion of the
business.
 Something to be sad about: Up until now, the Capital Goods were procured at a VAT of 14.5%.
The GST is levied at 18%, leading to a rise in costs.
 There is still ambiguity in the case of Purchase Orders that were sent out before the GST rolled
out and the capital being delivered in the aftermath. The restaurant owners are still confused as
to which rate will apply – the VAT or the GST. The accounting of taxes for the gestation period is
still ambiguous and many restaurants are yet to face the GST implications. Some of the vendors
have also put the orders on hold until this doubt is cleared. 
 Capital expenditure (investing in capital for the business) could rise because of an increase in the
procuring cost of capital goods.

ONLINE DELIVERY STARTUPS:

The growth in the organized food services industry and new age food booking and delivery
startups (Swiggy, Tiny Owl, Foodpanda, Zomato and the like) would contribute significantly to
the revenues of the country.

However, currently, E-commerce companies will not be required to collect one percent TCS
(Tax Collected At Source) while making payment to suppliers under the GST regime. Small
businesses ( those with turnover less than Rs 20 lakh ) will also not be required to register
themselves under the GST for selling goods or services through an e-commerce portal. This step
has been taken to provide more time for persons liable to deduct tax at source/e-commerce
companies and their suppliers to prepare for the historic tax reform.

Nonetheless, with a single unified tax rate, restaurant owners are already taking a sigh of relief as
lower taxes are attracting more consumers as they have benefitted by 6-8% from their previous
restaurant bills. 

COMPOSITION SCHEME UNDER GST:

Restaurant sector may opt for this scheme only if their annual turnover is < Rs. 75 Lakhs. A
registered taxpayer in the restaurant sector, who is registered under the Composite Scheme will
pay tax at a rate of 2.5% each for CGST AND SGST respectively.  A composition dealer is not
allowed to avail input tax credit of GST paid to their supplier.

For detailed information regarding this, you can read this article – Cleartax

HOW TO SHIFT TO THE GST FRAMEWORK ONLINE:

Any individual or entity that fulfills any of the following conditions need to get GST
Registration:

1. Having an annual aggregate turnover from operations in the state more than 20 Lakh (Rs. 10
Lakh for the North-Eastern States).
2. Currently registered under any of the existing indirect tax regimes (VAT, Excise Laws, Service Tax
Laws) irrespective of the threshold limit.
3. Having operations in multiple states.
4. Required to pay tax under Reverse Charge.
5. Supplying goods or services through E-commerce Operator.
6.
Businesses are required to shift from a service tax framework to a GST one through a registration
process. This service is also available online provided you have all the documents in hand.

 Go to aces.gov.in to log in to your service tax portal with the Registered ID and Password.
 Click on the option to obtain provisional ID for GSTN. The provisional ID and password will
appear on the screen.
 Further, go to gst.gov.in and click on New User Login.
 Fill PAN, Mobile No., E-mail ID and State in Part-A of Form GST REG-01 of GST Registration.
 You will receive a temporary reference number on your Mobile and via Email after OTP
verification.
 Click on “I Agree” button and “Continue” tab to proceed from the terms and conditions page. A
list of documents with max MB size of each is displayed on the screen.
 You will then need to fill Part-B of Form GST REG-01 duly signed (by DSC or EVC) and upload the
required documents specified according to the business type.
 You will receive acknowledgment in Form GST REG-02.
 In case of any information sought from you in Form GST REG-03, you may need to visit the
department and clarify or produce the documents within 7 working days in Form GST REG-04.
 The office may also reject your application if they find any errors. This information will be in
Form GST REG-05.
 Finally, a certificate of registration in Form GST REG-06 will be issued to you by the department
after verification and approval.


A private limited company requires the following documents:

1. Incorporation certificate and constitution documents

2. PAN
3. Board resolution for signatories
4. Bank statement
5. Declaration to comply with GST norms
6. PAN and ID proof of directors
7. Address proof of registered office.

Points to note

* A person with multiple business verticals should have multiple registrations under GSTN for
each business.

* PAN is mandatory for GST registration.

 
1. Background

Not so long ago in order to have a one off scrumptious meal, an ordinary citizen was required to
go through the travails of an inordinately long distance to an upmarket restaurant and satiate
one’s palate. On the downside, however, this would entail one to have deep pockets and would
limit such visits to only a couple in a month. Recognizing the dearth of time in people’s lives and
their urge to have everything readily delivered to them, the young Indian entrepreneurial minds
tapped into a market segment that had high risks coupled with higher rewards. This sector was
‘Food Delivery’.

This Article aims at analysing the business models of such food delivery startups and how Goods
and Services Tax (‘GST’) will have an impact on their operations, margins and compliances.

2. Prevalent Business Models

Startups (‘websites’) engaged in food delivery sector can prima facie be divided in two models
based on their serviceofferings:

2.1 Pick and Deliver (‘Marketplace Model’)

2.1.1 The website operates through a mobile appthat depicts menus of different restaurants.
Exampleof such websites are Swiggy, JustEat, TinyOwl etc.

2.1.2 The website has tie ups with different restaurants and offers its services of food delivery.
The customer orders food on the website and makes the payment either through credit/debit card
or in cash on delivery. The payments are collected by the website.

2.1.3 The website charges commission ranging from 7.5% to 20% from restaurants for getting
them orders and also charges commission to list them on its website.

2.1.4 At the end of the month/week, the website, after deducting its commission, makes net
payment to the restaurant for food sold via its website.

2.1.5 Currently,the website charges Service tax from restaurants on its commission.

2.2 Cook and Deliver

2.2.1 The website operates through an app which shows its own food menu. The website
operates solely on delivery model and has nodine-in facility. Example of such websites are
Batman Delivers, Yumist, FreshMenu, Madbites etc.

2.2.2 The website charges for food (and sometimes for delivery).

2.2.3 Currently, the website charges Value Added Tax (‘VAT’) on sale of foodto its customers.
There is no Service tax on food outlets purely into delivery without any dine-in facility.

3. Impact of GST

3.1 If we have a look at the ‘Marketplace Model’, the website is solely providing service of
food delivery from listed restaurants to customers premises. The different legs of transaction
have been analysed hereunder:

Current Indirect Tax

Transaction Under GST structure
structure
Between ♣ Service Tax levied on ♣ Introduction of the concept of ‘supply’ that
Restaurant & commission charged by the includes sale, barter, exchange, license, rental etc
Website website. of goods and servives;

♣ Commission charged from the restaurant is a

supply of service, subject to GST;

♣ One area of concern is whether supply of food

from restaurant to the website (for delivery to
customer) shall also be considered as a supply,
subject to GST. This view emerges from a
combined reading of the term ‘agent’ that is
inter alia defined to include a person who
supplies or receives goods on behalf of another
and the term‘supply’ that includes transactions
between a principal and an agent and the
term‘supplier’ that means any person supplying
goods/services and includes an agent acting on
behalf of such supplier in relation to the goods
and services.
 ♣ This further gets strenghtened by reading the
Schedule I of the Model GST Law, where supply
of goods without consideration by a taxable
person to another taxable/ non-taxable person in
the course or furtherance of business are deemed
to be a ‘supply’.

♣ Basis the above, a view emerges that

transaction of handing over (supply) of food by
the restaurant to the website (even though the
website acts as an agent) may be subject to GST.

♣ Although, the above view seems visible upon

reading the provisions of the Model GST law,
any such interpretation shall make the concept of
agent redundant and the concept of GST flawed.
♣ The website may charge a
♣ As discussed above, transaction between the
Between consideration for delivery of
website and the customer may get covered as a
Website & food to the customer on
supply, subject to GST. However, this issue is
Customer which Service tax may
subject to clarification from the Government.
apply.
♣ In an ideal scenario, the restaurant should
charge GST on sale of food, to be collected by
the website for onward transfer to the restaurant.
Between ♣ The restaurant charges
Similarly, commission earned by the website
Customer & VAT and Service tax (in
should be subject to GST.
Restaurant some cases) on sale of food.
♣ Other than the above, there should be no tax
implications under this model.

3.1.1. Further, should the transaction of delivery of food from the restaurant to the website be
considered a supply, there are different challenges to be managed. Currently, restaurant raises
invoice to the customer. Under GST the restaurant may have to raise the invoice in the name of
website so that the latter is able to avail credit of tax paid. Further, the website will raise invoice
on the customer. This will also cause issues around valuation considering a principal-agent
relationship between the restaurant and the website.

3.2 Now, moving towards the ‘Cook and Deliver’ business model, complications faced by
websites under this model will be less in comparison to the Marketplace Model. As per Schedule
II of the Model GST Law, the activity of Cook and Delivery shall be a ‘deemed supply of
service’. Thus, supply of food to customers under this model should be subject to GST.

3.2.1 The Cook and Deliver Model shall face a significant benefit in the form of reduction in its
costs. Under the current tax regime, service tax paid on input services that are utilised by the
website is treated as a cost. This is because the website is engaged purely in sale of food (goods),
thus, having only VAT liability and no Service Tax liability. Under the GST regime, input tax
paid by the website shall be available as credit (‘ITC’), hence, reducing their cost burden.

3.2.2 Place of Supply – How Will Food Delivery websites get affected

However, a complexity will be faced when any website supplies food from one state to the other.
Though, this may seem a distant possibility but for delivery websites based in places like
Gurgaon and delivering in Delhi may still be a case. Some lucidity may be expected on this
particular issue in the final law, but under the provisions of Model GST Law, as per Section 6 of
the Integrated GST (‘IGST’) Act, which elaborates upon place of supply (‘POS’) under different
scenarios, POS in case of such supply may fall under sub-section (1), (2) or (5). The relevant
verbatim of the law has been stated herunder:

‘(2) The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7),
(8), (9), (10), (11), (12), (13), (14) and (15), made to a registered person shall be the location of
such person.

(3) The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7),
(8), (9), (10), (11), (12), (13), (14) and (15), made to any person other than a registered person
shall be (i) the location of the recipient where theaddress on record exists, and (ii) the location
of the supplier of services in other cases.

(5) The place of supply of restaurant and catering services, personal grooming, fitness, beauty
treatment, health serviceincluding cosmetic and plastic surgery shall be the location where the
services are actually performed.’

3.2.3 In view of the aforementioned provisions, the Cook and Deliver Model may get covered
under sub-section (5) if such food delivery websites get covered as a ‘restaurant’. Under the
current tax regime and under the Model GST Law, there is no such inclusion. This takes us to the
general provisions, viz, sub-sections (2) and (3). It can be construed that in either case, such
supply shall be covered as inter-state supply, subject to IGST. Resultantly, this will have added
compliance burden on the website such as compulsory registration, no option of being registered
under Composition Levy etc.

3.3 Collection of Tax at Source (‘TCS’)

3.3.1 The Model GST Law proposes to cover online websites including the food delivery
startups as Electronic Commerce Operator (‘ECO’) defined under Section 43B of the Model
GST Law. Such ECOs will get covered under the ambit of the new levy of collection of tax at
source (‘TCS’) under section 43C.

3.3.2 Let us try and understand how the website shall collect and deposit TCS on behalf of the
restaurant with the help of an example.
3.3.3 Customer buys food worth INR~1,000 and pays INR~200 (20% GST rate assumed) as
GST on the same to the website. Thus, the website collects INR 1,200 on behalf of the restaurant
and passes the consideration net of commission.

*Assuming website charges a commission of 10%, invoice raised by website to restaurant would
show:

Particulars Amount (INR)

Charges for Commission 100
(+) GST (assumed 20%) 20
Total invoice value 120

**Consideration for food is INR1,000. TCS collected on the same would be INR200 (assuming
TCS rate is same as GST rate). Website would pass on [consideration for food less TCS less
commission charges (including tax)] to the restaurant, i.e., INR1,200 – INR200 – INR120 =
INR880. The restaurant will avail INR20 as ITC and the website will deposit INR200 to
Government to the credit of the restaurant.

3.3.4 The provision of TCS means that everytime the website makes payment to the restaurants,
it shall have to collect tax at source and deposit with Revenue on a monthly basis and file
requisite returns. This process will surely lead to loads of added compliances for a website in
terms of deducting taxes, filing returns and keeping records for all such transactions.

3.3.5 This also means lesser cash flows for the restaurants and should any restaurant be less than
the GST registration turnover threshlod, any such tax deducted by the website will need to be
taken as a refund.

3.3.6 Whether the Cook and Delivery websites will have to collect TCS?

Clause (e) of section 43B has been reiterated hereunder:

‘‘electronic commerce operator’ shall include every person who, directly or indirectly, owns,
operates or manages an electronic website that is engaged in facilitating the supply of any goods
and/or services or in providing any information or any other services incidental to or in
connection there with but shall not include persons engaged in supply of such goods and/or
services on their own behalf.’

3.3.7 The obligation to collect and deposit TCS is only on an ECO. In accordance with the
definition of ECO, it can be construed that a person engaged in a cook and delivery website
should not qualify as an ECO since he is engaged in supply of service on his own behalf.
Conclusion

It is apparent that GST will surely create a paradigm shift in the way businesses will be done. For
the country as a whole, GST will bring out radical changes. Since the Indian GST strucutre is
dual in nature, businesses would need to now comply with many more statutory requirements in
the form of returns, tax payments and registrations. This shall also result in increased working
capital requirements and perhaps, increased investments in management and finance.

The food delivery websites should gear up with the changes that may be required in their supply
chain and ERP systems to avoid any last minute unnecessary complications.

Authored by Nimish Goel, Partner and Head of Indirect Tax/GST at International Business
Advisors (www.ibadvisors.co). Nimish has a vast experience of more than 13 years in Customs,
Excise, Service tax and VAT. Nimish has been a part of EY India and then with KPMG in
Europe where he learnt the nuances of GST and is a regular author of articles on issues related to
indirect taxes including GST. For any professional assistance, he can be reached on
nimish.goel@ibadvisors.co. Uday Mehta, Article Trainee assisted him in this article.