The withdrawal of input credit under the goods and services tax for restaurants will adversely affect their expansion plans this financial year, chains across formats said.
In the absence of input credit for expenses such as rent and other capital costs that attract GST of 18% to 28%, opening a new outlet has become substantially more expensive, said Speciality Restaurants, the operator of brands such as Mainland China and Oh! Calcutta. It typically costs Rs 2.5 crore to Rs 3 croreto set up a new restaurant.
“Since the GST paid on all input goods and services is no more available as credit, all taxes paid on input of goods and services, factor in as additional cost of the project,” said Anjan Chatterjee, founder of Speciality Restaurants. “This withdrawal of input tax credit has impacted the viability of new stores and expansion significantly. This will have a cascading negative impact on new investments being made by the chain as payback period is getting extended.”
The GST rate for for restaurants was slashed to 5% from 18% in November last year, along with the removal of input credit. While the industry has asked the finance ministry to allow input tax credit on rent, some chains said they don’t foresee changes to the existing structure before the general elections next year.
“Expansion plans will be put on hold till the time the real estate pricing gets rectified. Everybody’s going to wait and watch till the real estate developers agree to bring down the rental costs,” said Saurabh Khanijo, managing director of the Kylin chain of restaurants. “From this fiscal, we will be very cautious in signing up new places. We have withdrawn from 2-3 sites which were earlier planned which couldn’t be negotiated better.”
Khanijo said most restaurateurs end up paying more than Rs 300 per square foot as rent in a mall or high street for their outlets. A restaurant with an area of 2,000 to 3,000 square feet can command rent of Rs 8 lakh to Rs 9 lakh. High rental costs are leading chains such as Café Out of the Box, which has outlets in locations including Khan Market in New Delhi, to rationalise their locations and contracts.
“Rentals are exorbitant and it looks like the 5% GST without input credit is here to stay for now,” said Udit Bagga, director, Café Out of the Box. “We are talking to the real estate landlords and negotiating for minimum guarantee revenue-share models. We are cautious and are focusing on tier-2, tier-3 cities, where rentals are lower.” Zorawar Kalra, founder of Everstone Capital-backed Massive Restaurants, said the lack of input credit has brought down margins sharply, but the chain will continue to expand by tightening costs.