The big burger you eat, every weekend, will not be substantially cheaper after the new GST slab of 5 per cent on eating out at restaurants - it was 18 per cent earlier considering you splurged in an air conditioned restaurant. However, a preliminary analysis suggests that food services companies can, if they want, make your bill a tad thinner.
Restaurants owners, thus far, have been reluctant to pass on the GST rate cuts to the customer because the Input Tax Credit (ITC) has been disallowed. In the context of food services companies, inputs are various goods they buy to process further, which includes everything from paper and packaging material to vegetables, meat and dairy. They pay tax on each of these. If these companies are not allowed the ITC, it hits their profitability right away. Indeed, an entrepreneur described this as a " black swan moment for food services" - an event that is a complete surprise and would have a major impact. A few restaurant owners this writer spoke to pegged a spike between 7 per cent and 10 per cent in costs. That spike in costs could be more in some category of restaurants but even a small hit to margins can impact the stock prices of publicly listed food services companies.
Nevertheless, restaurants whose costs have risen 7-10 per cent can pass on a small percentage to the customer. Here is the maths:
Considering that the cost of a burger was Rs 100 in the earlier avatar, the customer would be billed at Rs 118 with an 18 per cent GST rate. Now, factor in the rise in costs - between 7 and 10 per cent. The burger, pre-tax, costs Rs 107-Rs 110. When a 5 per cent GST rate is applied, the billing price is between Rs 112.35-Rs 115.5. Versus the earlier GST regime, a customer's bill could then be cheaper between Rs 2.5 and Rs 5.65.
Now, a larger question: Would you not want a restaurant to keep that margin so that they make you better burgers, train its workforce better, and improve services? You pay not just for the food, but the experience.