Tens of thousands of hotels and fast-food joints are staring at an uncertain tax regime post July 1 as the goods and service tax (GST) caps composition benefits at Rs 50 lakh of annual turnover.
They are now paying a 4% tax under the composition scheme and a steep rise in GST rate, as is expected, will push up the prices of snacks, a section of hoteliers ET spoke to says.
Composition tax is a tax payable on turnover at a specified rate. The claimant, however, is ineligible for input tax credit. This has created a situation where food joints will have to collect GST on each transaction once the new tax regime kicks in. Hoteliers fear not only an increase in compliance costs, but also harassment.
Hotels and other food joints are likely to find it difficult because of the sheer nature of their business. Many darshinis – a fast-food outlet format Bengaluru invented – sell coffee tea for Rs 5 or Rs 10 a cup because of the ease composition tax scheme offers.
“Most of the items that we use in the hotel industry such as grains, vegetables and coriander are exempt from tax and hence there is no question of claiming any input tax credit,“ said P Sadananda Maiya, founder of Maiyas, a chain of restaurants.
“We have requested to continue with the composition tax for hotels regardless of the turnover,“ he said. Agriculture Minister Krishna Byregowda, who represents Karnataka in the GST Council, told ET that the rate of taxation on restaurants with a turnover above Rs 50 lakh is yet to be decided. “We will keep in mind the issue of price rise.”
Karnataka, according to BA Harish Gowda, a former Commissioner of Commercial Taxes, always extended the composition benefits to businesses in a few sectors that source their inputs from unorganised sectors in view of the difficulties they would otherwise face with compliance. The composition tax was a win-win for both government and businessmen.
“We discovered from an internal study that the composition tax the hotel industry pays is reasonable because the kind of items that they sell are perishable. Hotels love it too because of hassle-free compliance,“ said a former top VAT administrator.
The GST regime requires a hotelier to generate a bill net of input taxes already paid, add his margin, and show State GST and Central GST separately before issuing the invoice, a copy of which the hotel will have to keep to report compliance.
“Since the whole process is so laborious, hotels are likely to continue with tax cascading. They are not used to maintain item-wise billing because the commodities they use are tax-exempt anyway,” said the person quoted above.
In the present scheme of things, there is no discretion for states. The GST Council will have to study the issue. “The Empowered Group of State Finance Ministers argued on the same lines before VAT was introduced in 2005 but we fought and got it. The scheme worked so well, and I don’t understand why they cannot continue it now,“ said a former top official at the Commercial Taxes department.
Krishna Byregowda said Karnataka is the one state that brought up the issues at the GST Council and pushed for composition tax for hotel industry . “It was at our request that the GST Council agreed for some relaxation and amended the draft law. This should ease the functioning of small restaurants and public who visit them,“ he said.
The manner in which the government has sought to introduce GST may end up pushing up the prices of snacks for the common man rather than softening them, said Suhas Upadhya, director, Taaza Thindi, a South Indian fast-food brand in south Bengaluru. “What we sell are items that meet the daily needs of people and a higher tax will definitely be inflationary ,“ he added
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