The recent announcement during the Union Budget 2013-14 that the government would levy an additional service tax on all air conditioned restaurants came as a rude shock to the Indian F&B fraternity. Many restaurateurs believe that this could result in less consumption leading to no improvement in revenues.
The F&B segment, which is one of the fastest-growing industries, may come under a lot of pressure over the new policy. Samir Kuckreja, President, NRAI, says: “We are very disappointed with the government’s new policy and feel that it will act as a dampener to consumption. The frequency of eating out will go down and I don’t think this will help improve tax revenue.” The whole economy has slowed down. So this policy would further increase the burden on consumers in the wake of high inflation. Hence, now the tax that the consumer would have to pay will range somewhere between 18 and 25 percent, he further adds.
According to Murali Krishna Parna, COO, Sagar Ratna, the policy makers have clearly considered all air conditioned restaurants to be a luxury indulgent and it seems that this assumption has formed the basis of this diktat. “The end-consumer is going to be impacted by this policy. The frail consumer who probably got out once to eat out with his family may restrain from spending often,” Parna suggests.
Manpreet Gulri, Development Agent and Country Head, Subway Systems India, feels that a product should be ideally taxed either as goods or as services. If service tax is levied on 40 percent of the value of the invoice, then VAT should be on the balance and not on the entire amount. This double taxation makes restaurants more expensive.
Also, there are restaurants that have more open and some air conditioned space. Under the new policy, it does not matter if part of your restaurant is air conditioned or vice versa, the additional service tax will be applicable to all.
“In the short term I think the consumer will feel the pinch, given that the economy and businesses have been going down for at least about a couple of quarters. But if we look at it from a long-term perspective, maybe with income rising, the economy doing good, things can get better. But this is yet to be seen,” says Parna.
Similar sentiments are echoed by Kuckreja as well. “Eventually, as mentioned earlier, consumption will reduce, as will the frequency of people eating out. Even when you are buying an ice cream or taking away food from a fast food joint, you are paying up to 25 percent in tax, it is going to hurt the pockets of the consumer,” he opines.
But Gulri of Subway is not shying away from seeing the bright side of this policy. He explains that if the price increase is accepted by customers, it will help the profitability of restaurants.
The Way Out
As a restaurant, we have no choice but to charge the customers, quips Parna. “Service tax is applicable even on VAT. So there is an incidence of double taxation as well. I do not think anyone can put this additional tax in the food cost or something like that. It has to be collected from the customers,” he adds further.
Kuckreja feels that the restaurateurs just need to tell the people to be ready. “You need to get the software modification done, you have to educate your customer about the new policy and get the fine prints on your menu or digital sign boards or menu boards,” opines Kuckreja.
Reasoning with Government
Many restaurateurs believe that air conditioning in no more a luxury and is not part of the ambience; it is a necessity. Hence, this policy does not make much sense to them. According to Kuckreja, NRAI has taken up the issue and tried to reason with the government for a complete rollback of this policy. According to Parna, they met up with the government officials and he feels that they understand the consequences it will have on the overall F&B industry. But, they may be broadening the scope of taxation and reduce challenges at the operational level of collecting taxes so that there is no ambiguity in terms of collection of taxes.
Even Gulri feels the government’s logic seems to be that there is a portion of service involved in the operating of a restaurant and the same should be earmarked and appropriately taxed. He also confirms that they have not approached the government themselves but hope that restaurant associations will table this with the concerned authorities on their behalf.