Taxation on Restaurant omposition Restaurant

[NILESH PITALE]

Dear Expert

What is tax Rate for Composition Restaurant  ?

What is Tax rate  Other than Composition Restaurant, What will be ITC Position?

Please Guide

[Sadanand Bulbule]

In terms of Notification No.11/2017-CTR dated 28.06.2017, the rate of 18% GST with ITC for restaurant services supplied at "specified premises"-within hotels charging tariff Rs, 7500/ per night per room during the FY 2024-05 effective from 01/04/2025.

For other restaurant services supplied outside specified premises like standalone restaurants including catering services, the rate of 5% tax without ITC is applicable as per entry 7(ii) of Notification No. 11/2017-CTR.

[YAGAY andSUN]

A restaurant opting for the Composition Scheme under Section 10 of the CGST Act is liable to pay tax at a rate of 5% (2.5% CGST + 2.5% SGST) on its turnover, but is not eligible to collect tax from customers or avail Input Tax Credit (ITC) on its purchases.

In contrast, a regular (non-composition) restaurant is liable to pay GST at a rate of 5% (2.5% CGST + 2.5% SGST) under Notification No. 46/2017-Central Tax (Rate), but without ITC, or may opt to pay 18% (9% CGST + 9% SGST)with full ITC if operating within a hotel having room tariff above the prescribed threshold or supplying outdoor catering services. Thus, the choice of rate directly impacts the eligibility to claim ITC.

[Shilpi Jain]

In both cases it is 5%. The difference being that under composition not eligible to collect GST from customers.

Also if its a standalone restaurant then cannot opt for 18%.

[Shilpi Jain]

So looks like composition has lost its sheen for the restaurant sector.

[YAGAY andSUN]

Yes, the Composition Scheme under GST is gradually losing its sheen, and this trend can be attributed to a combination of structural limitations and evolving taxpayer behavior. Here’s a concise analysis:

Overview of the Composition Scheme

The Composition Scheme under GST is designed for small taxpayers with turnover up to ?1.5 crore (?75 lakh for NE and hill states), allowing them to pay tax at a lower fixed rate (1% for traders, 2%-5% for manufacturers and restaurants) without the need for detailed invoicing or ITC compliance.

Why It’s Losing Popularity

1. No Input Tax Credit (ITC)
Composition taxpayers cannot claim ITC on their purchases, making their products costlier for B2B buyers. This affects competitiveness, especially in trade channels involving registered businesses.

2. Restricted to Intra-State Sales
Inter-State supply is not permitted (except for service providers under special provisions), which limits business expansion and restricts access to larger markets.

3. Narrow Eligibility
The scheme excludes specific sectors such as ice cream, pan masala, and tobacco, and prohibits use by businesses supplying through e-commerce platforms, further limiting its applicability.

4. Increased Compliance Ease in Regular Scheme
With improved GST return filing tools, automation, and advisory services, even small taxpayers are now more comfortable with the regular scheme where they can avail ITC and expand business scope.

5. Customer Preference
Many customers, especially registered ones, prefer dealing with regular taxpayers to claim ITC. This discourages B2B transactions with composition dealers.

6. Tax Cost Absorption
Composition tax is paid out of pocket (cannot be collected from customers), impacting margins, especially in high-volume, low-margin sectors.

Recent Trends & Data

Data from GSTN and CBIC suggests a decline in fresh registrations under the Composition Scheme, with many opting to switch to the regular scheme once business scales up or due to market compulsions.

Conclusion While the Composition Scheme still provides initial relief to very small businesses, its practical limitations in a rapidly digitizing and competitive market are leading to a decline in its appeal. Unless further simplified or expanded in scope, it may continue to lose relevance in the long term.

AI Summary

Composition restaurants pay 5% GST without ITC while regular restaurants face varied rates based on operations A taxpayer inquired about GST rates for composition restaurants versus regular restaurants and ITC eligibility. Experts clarified that composition restaurants pay 5% GST on turnover but cannot collect tax from customers or claim Input Tax Credit. Regular restaurants also pay 5% GST without ITC for standalone operations, or 18% with full ITC if operating within hotels above prescribed room tariffs or providing outdoor catering. The discussion concluded that the composition scheme is losing appeal due to ITC restrictions, limited inter-state sales, customer preferences for registered dealers, and increased compliance ease in regular schemes.