Mastering the Menu: Key Tax Considerations for Restaurants in 2024's Regulatory Environment

The Indian restaurant market has experienced remarkable growth in recent years, with the National Restaurant Association of India (NRAI) reporting a market size of Rs. 5.99 lakh crore, growing at a compounded annual rate of 9%. However, this expansion has been accompanied by a rapidly changing tax landscape, putting significant pressure on restaurateurs to stay on top of their financial obligations. Here is a sneak peek into some of these shifts.

Direct Taxes: Navigating the Income Tax Act, 1961

Restaurant businesses in India fall under the "Profits and Gains of Business or Profession" (PGBP) chapter of the Income Tax Act, 1961. This means that in addition to obtaining a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN), restaurant owners must understand the various provisions and deductions applicable to their establishments.
One key consideration is the applicability of presumptive taxation under Section 44AD of the Act. Eligible businesses with a turnover of up to INR 2 crore can opt to pay a flat tax rate of 8% (or 6% for digital transactions) of their total turnover, potentially simplifying the tax filing process. This provision allows for a more straightforward method of calculating taxable income as opposed to maintaining detailed financial records.

Furthermore, restaurateurs must know the deductions available under Sections 30 to 37 of the Income Tax Act, 1961. These deductions can include rent, repairs, depreciation, additional depreciation (if applicable), and other expenses directly related to business operations. Careful documentation and proper categorization of these expenses can help optimise the restaurant's tax liability.

Conversely, the Act also specifies certain disallowances, such as wealth tax, fines, and penalties, which cannot be deducted from the restaurant's taxable income. Understanding these disallowances is crucial to ensure accurate reporting and avoid potential disputes with tax authorities.

Indirect Taxes: Navigating the Goods and Services Tax (GST)

The introduction of the Goods and Services Tax (GST) in 2017 has significantly transformed the indirect tax landscape for restaurants in India. This comprehensive tax regime has replaced the previously fragmented systems of value-added tax (VAT) and service tax, providing a more streamlined approach to compliance. 

Under the GST framework, restaurants are categorised into three broad groups based on factors such as the presence of air conditioning and the availability of a liquor license. These categories determine the applicable GST rates, which range from 5% for restaurants without air conditioning or a liquor licence to 18% for five-star hotels and luxury establishments.

One notable aspect of GST for restaurants is the composition scheme, which allows businesses with a turnover of up to INR 1.5 crore (INR 75 lakhs for special category states) to pay tax at a concessional rate of 5% without the ability to claim input tax credits. This option can be particularly beneficial for smaller establishments, as it simplifies the compliance process and reduces the administrative burden.

Even if the restaurants do not fall under the composition scheme, they have an option to pay only 5% GST without claiming any input tax credits. However, in this scenario, the GST returns need to be filed on a monthly / quarterly basis as opted by the business.
In case they want to avail input tax credits, then they need to pay GST @ 18% on the sales. Again, the GST returns need to be filed on a monthly / quarterly basis as opted by the business.

It's important to note that the GST regime has also impacted the taxation of alcoholic beverages. While GST applies to food and non-alcoholic beverages, alcoholic beverages are subject to state-level value-added tax (VAT), which must be charged separately by restaurants. 

Compliance Requirements: Staying on Top of Tax Filings 

Ensuring timely and accurate tax filings is crucial for restaurant owners in 2024. For income tax, you'll need to file your returns under the appropriate form (ITR-3, ITR-4 SUGAM, or ITR-6) based on your business structure and income. This may include reporting your restaurant's income along with any other personal income sources, such as salary, rental income, or interest earnings.

On the GST front, regular filing of GSTR-1 and GSTR-3B returns is mandatory, with the latter due by the 20th of every month. Restaurants opting for the composition scheme will need to file quarterly returns in Form GSTR-4. Failure to comply with these filing requirements can result in penalties and interest charges, which can significantly impact the restaurant's bottom line.

Additionally, restaurants with a turnover exceeding INR 1 crore (for businesses) are required to undergo a tax audit, wherein a chartered accountant is appointed to review the business's accounts and ensure compliance with tax regulations. 

Staying Ahead of the Curve: Navigating Tax Evolvement 

Tax laws and regulations are subject to frequent changes, and it is crucial to remain vigilant to ensure your restaurant remains compliant and takes advantage of available tax benefits. By proactively managing your tax obligations, you can optimise your financial performance, avoid potential penalties, and contribute positively to the growth of the dynamic restaurant industry in India.

Moreover, the increasing competition in the industry, driven by the rise of third-party platforms has led to a gradual decline in the monthly income for restaurants due to the embedded concept of discounts and freebies. In this challenging environment, effective tax management can play a vital role in maintaining the financial health and sustainability of your restaurant business.

Bottomline 

Navigating the intricate tax landscape is a crucial aspect of running a successful restaurant business in India in 2024. By understanding the direct and indirect tax obligations, leveraging available deductions and incentives, and ensuring timely compliance, restaurant owners can position their establishments for long-term success.

Remember, tax compliance is not just a legal requirement but an opportunity to optimise your financial performance and contribute to the growth of the vibrant restaurant industry in India. Stay informed, work with trusted advisors, and embrace the evolving tax landscape as a means to strengthen the foundation of your restaurant business.