Two days after the Railway Budget had created hopes of better services with the announcement of IRCTC’s proposed association with leading food brands like Cafe Coffee Day (CCD), Domino’s, Jumboking and Subway, the Union Budget for 2015-16 played a spoilsport by raising the rate of service tax from 12.36 per cent to 14 per cent. It is a classic case of giving with one hand and taking away the same by another. The general impact of the government action may be depletion in the buying power of consumers for their choicest brands of food and beverages. But implementation of the GST may just counter the negatives of this extra levy.
With increase in the service tax and its coverage area, the Union Finance Ministry expects to garner higher revenues. There is no doubt that the government is desperate to mobilise funds to finance its flagship projects and reduce the mounting fiscal deficit. But the means it has chosen may well spike its objective. By and large, the increase in service tax at restaurants and cafes may have its bearing on the brands like Bite Foods, Subway, Pizza Hut, Costa Coffee, and Pita Pit, patronised by young crowds with limited purchasing power. Ironically, it will result in lower generation of service tax. It is known wisdom that a lower rate of taxation yields more tax receipts. And yet the government has chosen to go against this golden rule.
The railway’s move is indicative of the evolving food preferences of Indian consumers who would now be able to get an interesting and diverse menu to choose such as hot and tasty pizzas on train seats. But the hike in service tax would negatively impact hotels, quick service restaurants (QSRs) and cafes as they operate in an extremely price-sensitive and competitive market. The said increase is expected to give a fillip to inflation across the board, considerably denting the common man’s power to spend at eating outlets.
We all know that the service tax was already quite high and its further revision would only lead to consumers shelling out more money on various services, which will reduce their spends on eating out. It will have its adverse imprint on the revenues of food retail companies that thrive on large-scale sale. Also, service tax on freight of food stuff no longer stands exempted; this too will lead to more escalation in food prices.
The budget also proposes to levy service tax on online and mobile advertising which will adversely affect the chain of mobile development start-ups, food tech start-ups advertisers and publishers. All these factors may accentuate price rise in general, discouraging consumer expenditure at food retail outlets.
By not reducing tax and spurring consumption, the government does not seem to be encouraging the growth of food retail industry. However, on a positive note, it proposes to implement the Goods and Services Tax (GST) starting April 2016. The GST will be a comprehensive levy that will do away with multiple taxes. It will allow retail sector to become more tax efficient resulting in lower prices of products. Eventually, it will have a sobering effect on inflation, facilitate industrial growth and improve business climate in the country.
So, with the GST rollout in the pipeline, the increase in service tax for FY2015-16 may not have any excessively detrimental effect on foodservice industry in the long run. Also, the industry will continue to thrive upon its growing clientele comprising youngsters and working women, with additional impetus coming from enhanced health consciousness and a booming tourism industry. Having said that, implementation of the GST is a must, not just for cost efficiencies, but also operational efficiences for foodservice businesses in India.
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