Expansion plans of restaurants take a hit due to Goods and Services Tax tweak

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The withdrawal of input credit for restaurants under the Goods and Services Tax (GST) regime is expected to affect the expansion plans of these businesses in a negative manner. Rent and other capital costs attract GST of 18-28%. The absence of input credit for these costs implies that the overall expense of opening a new outlet has now become higher.

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The removal of the input tax credit for Goods and Services Tax paid will have an adverse effect on the expansion plans of restaurants in India.

Speciality Restaurants, the operator of restaurants such as Oh! Calcutta, Mainland China, and Sigree, has highlighted this issue recently. Anjan Chatterjee, the founder of Speciality Restaurants, mentioned that the absence of input credit on GST paid for all goods and services would result in additional cost to the restaurant operator. He said that this is likely to affect the expansion plans of these stores, and will have a cascading effect on the investments made in the sector. The cost of setting up a new restaurant is usually Rs.2.5 crore to Rs.3 crore.

In November 2017, the rate of GST for restaurants was reduced from 18% to 5%. The input credit facility was also removed. The industry has requested the finance ministry to allow input tax credit on rent. Some chains have also said that there will be no changes to the existing structure before the upcoming general elections.

Saurabh Khanijo, MD of the Kylin chain of restaurants, has said that their expansion plans have been put on hold till there is a rectification in the real estate prices. The company is also very cautious when signing up for new places; several sites that were already planned have been put on hold as well. Khanijo said that the cost of renting an outlet in a mall or an upmarket locality can go up to Rs.9 lakh. The rising rental costs have resulted in several outlets rationalising their contracts and locations.

Some restaurants are also in discussion with landlords to negotiate on revenue-share models. In addition, there are plans to expand to tier-2 and tier-3 cities where the rate of renting space is lower. Restaurants are of the opinion that the removal of input credit has lowered their margins, but they are looking to tighten costs to overcome this issue.

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