TIOL - COB( WEB) - 957
JANUARY 30, 2025

By Shailendra Kumar, Founder Editor

IT's Union Budget time and the air in the economy is laden with sanguine expectations! But it may turn your bright green matcha a bit 'sooty' if you are a restaurateur and hoping for good news from the Union Finance Minister on the GST front! The finance bill has not much to do with the GST except for being the valet for the law amendments approved by the GST Council. The food services industry is a worried and sallow-faced segment of the economy. Though a few amendments in the Income Tax Act vide the Finance Bill 2025 may put this industry on velvet but the real therapeutic pill for them is the Input Tax Credit (ITC), which has been denied to them under the GST law. The GST Council, impelled by the forces of realpolitik, often act oblivious of the fact that ITC is the ultimate aphrodisiac in the GST system.

GST is globally acknowledged as a pass-through tax only because of its intrinsic core character of letting the businesses binge on the credit available in the ledger. If ITC is denied to a particular sector, the GST tends to lose its raison d'être as it becomes a case of 'tax on tax'. And such cascading not only defeats one of the key purposes of the GST but also un-sweetens the tax reform for the consumers. What further makes it counter-productive for the Caudillos and the policy-makers is - ITC-denied industries prefer to source their inputs from unregistered suppliers to protect their margins. Such popular market practices again militate against another fundamental goal of introducing the GST system and hollows out the prospects of growth in the tax-base. More worryingly, such a tax regime transmogrifies into an outstanding disruptor for the future investments and growth story of the industry. Though there are many such sectors in the economy but my 'taste' case, today, is the food services industry.

The GST chariot rolled out with two-layered tax rates - 12% for non-AC restaurants and 18% for AC ones. Of course, with its soul - the ITC. A two-faceted drama soon unfolded. One, unlike the erstwhile regimes of State VAT on the food and the Service tax on the services, the GST got embedded into the food bill as one zombie component, not to be missed even by a blithe foodie. What further added ammunition to the incendiary situation was that a large number of restaurateurs simply stomached the ITC rolled into their margins rather than passing it partly to their patrons. This sparked a furore on the troll-friendly social media. 'TikTok-ised' consumers heaped scorn and contempt on the new tax regime in the early days of GST. It was, by all measures, a tinderbox situation! Predictably, the lawmakers turned trepidatious and put the issue on the Agenda for the 23rd GST Council meeting on 10th November, 2017 in Guwahati, Assam. A concoction of views was expressed by the States, including the one to place this sector under the Composition Scheme i.e. no ITC. The bravura of the Chairperson later became the rallying point and the conflicting experiences, finally, settled in favour of 5% tax with no ITC as bringing it under the Composition Scheme would have entailed an amendment in the law. This was to douse the fire by punishing the entire industry! However, what got caught in the melee was also the efficacy of the GST system and the growth prospects of a flourishing industry.

In hindsight, if one looks at the Council's decision, what becomes crystal-clear is the faux pas made in haste. The Council failed to correctly read the tea leaves of protest. The Council's decision was aimed at pacifying the rising din originating from the diners. Rather than extracting a pledge from the National Restaurants Association to pass on benefits of the ITC to the consumers and launching a parallel awareness campaign, the lawmakers took a blinkered view of the problem and opted for wonky solution, enmeshed with the seeds of a future economic crisis! What has triggered a multiplier effect on this industry is a stubborn inflation - food items are outside the basket of goods reckoned for working out the headline inflation. Sustained inflation has eaten into the margins of the industry which has also resulted in rapid demise of thousands of standalone restaurants. The problem is no less gnarly for the branded chains which need to pour in capital into modern state-of-the-art kitchens, equipment and the aesthetics of the indoors. Such investments, which partly come from foreign investors, into infrastructure, are not eligible for ITC, and that kills the élan of the industry.

Let's swirl to the contribution of this industry to the GDP, and, more significantly, to the job market. The global food service industry is going to be about USD 2.7 trillion in 2025, and is projected to be about USD 4.5 trillion by 2028. It is estimated to be about USD 362 billion in the US and may double by 2030. Given the CAGR of over 13%, the Indian food services market is projected to leapfrog from USD 89 billion to USD 140 bn by 2030. With the drip of aid of new age technology and online platforms coupled with the rapid pace of urbanisation and a massive jump in eating-out-habits, its contribution to the GDP may rise from 1.9% of the GDP to 2.6% by 2030 provided a stable and fair tax system undergirds its foundation. As per one study, Quick Service Restaurants are projected to grow above 21%; Casual or Fine Dining also by 21% and Pub, bars & lounges (PBLs) by over 20% if the Council restores the ITC facility to the industry. An equity-based tax system would spur the CAPEX potential by infusion of more funds and improve the competitiveness of the industry. The food bills would automatically stabilise once the economy of scale is achieved in the industry. More importantly, it presently employs about 85 lakhs people. This number would jump to 1.32 Crore by 2030. What is more germane to the Indian job market is that it can accommodate lakhs of unskilled and semi-skilled workforce which inundates our economy today. This number can be much bigger if a holistic support is extended to the unorganised component of this industry, which happens to be the largest component with over Rs 3.2 lakh crore turnover out of Rs 5.7 lakh crore market size.

In terms of revenue, this industry accounts for 1.39% of the total GST collections annually. In absolute terms, it contributes Rs 30,000 Crore. If it is provided adequate support along with the ITC facility, its projected growth can chip in over Rs 56000 Crore to the revenue kitty by 2028. Secondly, the old tax regime of 12% and 18% with ITC would also pause the present market practice of purchasing raw materials from unregistered suppliers which is rampant today. Thirdly, sourcing inputs from registered suppliers would bring thousands of unregistered suppliers in the GST-fold. Fourthly, the growing umbrella of tech-based kitchen solutions would cushion the growing size of gig workers in the economy. A healthy and competitive market environment would also rescue lakhs of SMEs which tend to perish within a year, today. And lastly, it would help further formalise this industry in a big way! In a nutshell, a time has come for the GST Council to review its hurried decision taken way back in 2017, and take a holistic call in favour of job-creation potential, besides the ability to chip in to the revenue kitty, of the food services industry which has over 6.7 crore food delivery platform users till 2024-end. The ground realities in the economy have changed in the past eight years. Time to unravel the inadvertent damage done in the past! Let the hands which feed millions, also have a 'Kiki' time! Ciao!