The goods and services tax (GST) on restaurants, including those in luxury hotels, is likely to be reduced next month.
A five-member ministerial panel set up by the federal indirect tax body, the GST Council, is expected to examine a proposal for reducing tax rates on restaurants at its first meeting on Sunday.
The panel’s recommendations will be placed before the GST Council at its 9 November meeting in Guwahati, a person aware of the development said on condition of anonymity.
The Council is open to lowering the 18% tax on air-conditioned restaurants and 12% on non-air-conditioned ones as policymakers appreciate that these tax rates have created an unpleasant impression on consumers about the tax reform.
“It is bad optics," said the person cited above.
Prior to the rollout of GST from 1 July, a service tax of 15% was levied on 40% of the food bills at restaurants, which worked out to 6% of the total food bill. In addition, states used to levy their own value-added tax.
While determining the GST rate on restaurants, the Council considered that in the new regime, more tax rebates will be available to restaurants, which would help avoid any increase in the tax burden on consumers.
Another official, who spoke on condition of anonymity, said many restaurants chose not to pass on the benefit of tax rebates to consumers.
The members of the ministerial panel—Assam finance minister Himanta Biswa Sarma, Bihar deputy chief minister Sushil Kumar Modi, Jammu and Kashmir finance minister Haseeb Drabu, Punjab finance minister Manpreet Singh Badal and Chhattisgarh commercial taxes minister Amar Agrawal—are likely to meet a second time before the 9 November Council meeting.
The terms of reference given to the panel for examination include “the tax structure of different categories of restaurants, with a view to their possible rationalization or reduction". The Council had originally kept the GST rate on restaurants housed in hotels rated five stars and above at 28% but subsequently lowered it to 18% in June.
The panel will also examine if the liberal scheme of quarterly tax payment available to small businesses could be made available to those engaged in inter-state supply of goods.
At its next meeting, the Council is also expected to examine lowering tax rates on a few other items as well, based on industry representations received so far.
At its last meeting, the GST Council decided to lower tax rates on 27 products, change rules to ease the compliance burden of small and medium enterprises and ease procedures so that exporters’ liquidity improves. The relaxation was in response to economic growth easing to 5.7% in the June quarter, the slowest pace in three years, from 6.1% in the preceding three months. Businesses slowing production ahead of GST’s rollout and the aftershocks of last November’s demonetization led to the deceleration in growth.
A finance ministry statement on Friday, however, quoted minister Arun Jaitley to say that there was clear evidence that the slowdown effects of demonetization and GST have now more or less played themselves out and that the economy is poised for strong and balanced growth.