The Government Can’t Do Much, If Restaurants Don’t Pass on Benefits of Lower GST

Dear Reader,

If you are on WhatsApp, I am sure you would have got a forward by now, which basically shows that eating out at a restaurant hasn't become cheap, after the Goods and Services Tax (GST) was cut to 5 per cent.

In fact, there has been a lot of hungama (for the lack of a better word) around this issue, with people demanding that the government take action against the restaurants. Let's try and understand this issue in detail.

The GST on restaurant bills was recently cut to 5 per cent. Earlier it was 18 per cent or 12 per cent depending on whether the restaurant was air-conditioned or not. Hence, the expectation was that the cost of eating out will come down, with the rate of tax being slashed. Nevertheless, nothing of that sort has happened in many cases. Hence, people have taken to WhatsApp, Twitter and Facebook to highlight this issue.

Before going further, it is important to understand that there is one basic difference between the new GST rate and the earlier GST rates of eating in a restaurant.

The new rate is a flat tax of 5 per cent (and that makes me wonder as to why is it still called GST). This means that no input tax credit is allowed. In case of earlier rates, the tax was a value added tax i.e. input tax credit was allowed. This basically meant that restaurants could claim a set off for the goods and services tax they had paid on their inputs. The inputs in this could be tax paid on dairy products, meat, vegetables etc.

But input tax credit is not allowed now. Hence, the new 5 per cent GST is not a value added tax. It's just another tax.

Now with the input tax credit not allowed, some restaurants are claiming that the cost of running their business has gone up. This has meant that the pre-GST price of the food products they sell, needs to go up, and in the process, there is not much of a difference in the end price that the consumer is paying for the food products.

McDonald's India says that with the input tax credit being withdrawn their operating costs have gone up by 10-12 per cent. And after taking this increase in cost into account, the effective tax benefit due the lower tax rate of 5 per cent, "would have been less than a per cent." As the Business Today magazine puts it: "A few restaurant owners... pegged a spike between 7 per cent and 10 per cent in costs."

The fact that input tax credit is no longer available, hence, there can't be much of a difference in the final price paid by the consumer now, as against earlier, is a perfectly valid argument to offer, on parts of the restaurants.

This hasn't gone down well with many people and they have taken to the social media urging the government to take action. They are not convinced about the validity of the input tax credit argument. They feel that this is just an excuse on part of restaurants not to cut prices and increase their profitability. Hence, the government needs to investigate and take action.

The trouble is that the capacity of the Indian government to do anything is fairly limited, let alone going around investigating so many restaurants. Also, it has other more important things to do. Given this, it is not in a position to check the books of accounts of the large number of restaurants. And more than that, it should not even try to entertain any thought of doing this.

What I am saying is that if a restaurant chooses not to decrease price now, it can always offer this explanation of lack of availability of input tax credit, and there is no way to contest the explanation. The government cannot go into the accounts of each and every restaurant in the country in order to establish whether the explanation holds in their case or not. Of course, many restaurants obviously will look at this as an opportunity to make more money, and which is precisely what they will do. There is no denying that.

So, what is the solution to this? If you as a consumer feel a restaurant is expensive simply don't go there. If enough people do that the restaurant will automatically have to cut prices. If people continue going, then the higher price doesn't really matter to them and they shouldn't be really complaining.

Also, these are the unseen effects of starting with high tax rates. The trouble with bad economic policy (while GST is not bad policy per se, but its implementation clearly is) is that its ill effects are not always clear from the very beginning. This is now starting to come out in case of GST.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Vivek Kaul is the author of the 'Easy Money' trilogy. He tweets @kaul_vivek