McDonald’s West & South India franchisee – Hardcastle Restaurants Pvt Ltd., had dragged the government to court over non-availability of input tax credit in the current Goods and Services Tax (GST) operating framework for restaurants. Their writ was admitted by the court on November 14 after which it had issued a notice to the centre to reply by December 11.
Restaurants are currently levied a 5% GST but they are not allowed to claim the input tax credit (ITC) against the tax they pay on raw materials and other expenses such as rent. The history of this goes back to November 2017 when the effective GST rate was reduced to 5% from 18%. The previous 18% GST allowed them to claim input tax credit, however under the 5% rate, they can’t do that.
Hardcastle Restaurants have petitioned for the option to avail of input tax credit by paying a higher rate of tax. The National Restaurant Association of India (NRAI), which represents more than 500,000 restaurants, also had written to the revenue secretary earlier this year, arguing that the denial of input tax credit had adversely impacted the sector, leading to closure of 20,000 outlets last year itself.
“We are only requesting the government to consider giving us an option to claim ITC. Over the years, we have invested significantly in creating a world-class ecosystem that includes an organised supply chain, capital goods procurement and availing of many other services that are critical to our business. Unavailability of ITC poses a significant challenge for us to scale and run our business in a sustainable way,” a Hardcastle Restaurants’ spokesperson said. Abhishek Jain, Tax Partner at EY, felt that while a lower rate had optically fared well with customers, a denial of input tax credit to restaurant businesses had increased their tax costs. “These businesses have for long been discussing with the government on an optional higher rate with input tax credit and would now also look forward to the final high court ruling on this,” said Jain.
The NRAI has been proposing 12% GST with option to claim ITC as an optimal solution.