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Planning To Start A Restaurant? Here’s Everything You Need To Know About The Tax Laws Prevalent In The Sector

After three years of GST, almost every industry has changed in terms of taxation, restaurants being one of them. Just like the food industry, businesses from all over the country are still trying to understand this complicated tax structure. The Indian government introduced this single indirect tax to replace many taxes like VAT, service tax, excise tax, and more.

Just like most of the categories of goods and services, the GST for restaurants was 18%. But it was reduced to 5% in November 2017 along with the abolition of the input tax credit( ITC). Before we get into the complexity of this new tax structure, let us first get familiar with the fundamentals of GST.

What is GST?

The goods and service tax is the single indirect tax that was introduced in July 2017 to replace the other indirect taxes like VAT, service tax, excise tax, and many more.

GST is a unified and four-tiered tax structure of 5%, 12%, 18%, and 28%. As a restaurant owner, you must know the category in which your restaurant falls. The very first step is to do gst registration online India and know your gst laws for a smooth taxation process.

GST Rates For Restaurants

As per the India Food Services Report of 2016 by NRAI (National Restaurant Association of India), the Restaurant industry is the third-largest industry in the service sector. It plays a vital role in the overall economic growth of our country.

The need for a defined tax structure for the restaurant industry was also rising in the country. It was the 23rd GST council that drafted some of the significant amendments in the tax structure for the industry.

As per the GST law, restaurants can be grouped into three major categories mentioned below:

  • Stand-alone restaurants
  • Restaurants within hotels
  • Outdoor catering

Below are the tax rates for different categories that you can follow for a streamlined taxation process:

  • Every restaurant has to pay a singular GST tax of 5% irrespective of their air conditioning and whether they serve alcohol or not. There is no option to claim ITC under this slab.
  • Restaurants that are stationed inside the hotel and have room tariffs under Rs. 75000 can not claim ITC and have to pay 5% GST. You can have the benefits of claiming ITC only if the room tariff of your restaurant within the hotel is more than Rs. 75000, but you will have to pay the 18% GST.
  • Outdoor catering restaurants have to pay the 18% GST with the benefits of claiming the input tax credit ( ITC).
  • Restaurants falling under the category of 18% GST and have a turnover of more than a crore can claim ITC whereas the restaurant in 5% category can not claim any input tax credit irrespective of their turnover.

Impact of New GST Rates On The Restaurant Industry

Just after the implementation of GST and these new amendments, top restaurant brands claimed that the new tax structure would adversely affect their revenues. The primary reason behind this response is the removal of the option to claim the input tax credit. It increased their capital expenses and cost of rent by 15 to 18%, according to some top restaurants.

As a result, the restaurant who were thinking to expand their business by opening multiple chains are reconsidering their decision. Instead, They are considering opening several outlets in five-star hotels to avail of the benefits of claiming the input tax credit.

GST Composition Scheme For Restaurants

The composition scheme is a more simple taxation structure to reduce the burden of taxpayers. In this scheme, the taxpayer can opt for paying GST at a fixed rate of turnover. You are eligible for the composition scheme if your turnover is less than Rs. 1000 crore.

There are a few conditions that you must follow if you want to take the benefits of GST composition schemes. For instance, you will not be allowed to undertake any inter-state supplies of goods and use of e-commerce delivery methods.


Paying taxes is one of the most critical components of the revenue cycle of any business. If you are planning to get into the restaurant business in India, you must do proper research in terms of taxation.