GST on Restaurants and Foods in 2025: Check Rates and Rules

What is GST on restaurants?

Goods and Services Tax (GST) on restaurants in India is a crucial aspect of the country's taxation system, aimed at streamlining and simplifying the tax structure for food and beverage services. Implemented on 1st July 2017, GST replaced multiple indirect taxes such as VAT, service tax, and central excise duty, creating a unified tax regime. Restaurants fall under different GST slabs depending on their services and turnover. Learn more about the LUT full form in GST to understand its application in various scenarios.

Restaurants are categorised based on whether they are air-conditioned, serve alcohol, or are part of a larger hotel establishment. The GST rates for restaurants are designed to create a balanced approach, ensuring that the tax burden is manageable for both businesses and consumers. The introduction of GST has also aimed to bring about transparency and accountability in the food service industry.

The GST Council periodically reviews the rates and rules, ensuring they remain relevant to market conditions and economic needs. Restaurants have to comply with these rules and file regular GST returns, which helps in maintaining a streamlined taxation process.

GST rates for restaurant services

GST Rate on Food Items

Original GST rules for restaurants

When GST was first introduced in July 2017, it aimed to create a streamlined tax system for the food and beverage industry. Initially, the GST rules categorised restaurants into different slabs based on their services and facilities, with a primary objective of eliminating the complexities of the previous tax regime.

Under the original GST rules, restaurants were classified as non-AC, AC, or those serving alcohol. Non-AC restaurants were taxed at 12%, while AC restaurants and those serving alcohol were taxed at 18%. This classification was designed to balance the tax burden between different types of food service establishments, ensuring fairness and simplicity.

The GST rules also mandated that restaurants file regular GST returns and maintain detailed records of their transactions. This was intended to bring about greater transparency and accountability within the industry. The input tax credit (ITC) was available to restaurants, allowing them to offset the tax paid on inputs against the tax collected on outputs, thereby reducing their overall tax liability. Learn how aggregate turnover under GST for registration plays a pivotal role in these filings.

However, the initial GST rates and rules faced criticism for being too high and complex, particularly for smaller restaurants. As a result, the GST Council reviewed and revised the rates, eventually lowering them to the current levels to make compliance easier and reduce the tax burden on both businesses and consumers.

GST composition scheme rules for restaurants

The GST composition scheme is a simplified tax scheme designed for small businesses, including restaurants, to reduce their compliance burden and ease the tax filing process. Under this scheme, eligible restaurants can opt to pay tax at a reduced rate of 5% on their turnover, rather than the standard GST rates applicable to larger establishments.

To qualify for the GST composition scheme, a restaurant must have an annual turnover of up to Rs. 1.5 crore. Restaurants opting for this scheme are required to file quarterly returns instead of monthly ones, significantly reducing the frequency of compliance and paperwork.

The scheme offers several benefits, including simplified tax calculations and lower compliance costs. However, it also comes with certain restrictions. Restaurants under the GST composition scheme cannot avail of the input tax credit (ITC), which means they cannot offset the GST paid on their purchases against their GST liability. Additionally, they are not allowed to supply goods or services through e-commerce operators.

The GST composition scheme aims to support small restaurants by making the taxation process more manageable and less burdensome. It is particularly beneficial for those operating in rural or semi-urban areas, where the administrative capacity to comply with standard GST rules may be limited.

Input Tax Credit (ITC) for restaurants

Input tax credit (ITC) is a significant feature of the GST system, allowing businesses to offset the tax they pay on inputs against the tax they collect on outputs. For restaurants, ITC can play a crucial role in reducing overall tax liability and enhancing profitability.

Under the standard GST rules, restaurants are eligible to claim ITC on the GST paid for various inputs such as raw materials, kitchen equipment, and other supplies used in their operations. This means that the tax paid on these inputs can be deducted from the tax collected on the sale of food and beverages, effectively lowering the net GST payable to the government. For a broader perspective, refer to the history of GST and its evolution in shaping tax policies.

However, there are specific conditions for availing of ITC. The restaurant must possess a valid tax invoice or debit note, and the supplier must have uploaded the relevant details in their GST returns. Moreover, the restaurant must have received the goods or services for which the ITC is being claimed.

Restaurants under the GST composition scheme, however, are not eligible to claim ITC. This restriction is one of the trade-offs for the simplified compliance and reduced tax rate offered by the composition scheme.

In conclusion, ITC is a valuable provision under the GST regime, enabling restaurants to reduce their tax burden by claiming credit for the tax paid on inputs. However, eligibility for ITC depends on the restaurant's compliance with GST rules and their choice of tax scheme. Restaurants must carefully evaluate their options and compliance requirements to maximise their benefits from ITC. This understanding is crucial for managing their finances effectively and may also influence decisions regarding business loans.

Exemptions for GST on restaurant

GST exemptions for restaurants are limited, as most food and beverage services fall under the GST ambit. However, certain exemptions and concessions are available under specific circumstances to reduce the tax burden on particular services or to support smaller establishments.

One notable exemption is for services provided by canteens and messes operating within educational institutions. These services are often exempt from GST to support affordable food provision for students. Similarly, food supplied at religious places like temples, mosques, and gurudwaras as part of free community meals (langar) is exempt from GST, recognising the charitable nature of these services.

Small restaurants with an annual turnover below Rs. 20 lakh (Rs. 10 lakh in some special category states) are also exempt from GST registration and payment. This exemption is designed to support micro and small enterprises by reducing their compliance burden and tax liabilities.

In addition to these exemptions, the GST composition scheme offers a simplified tax regime with a lower rate of 5% for small restaurants, though it comes with certain limitations, such as the inability to claim input tax credit (ITC).

Overall, while most restaurant services are subject to GST, specific exemptions and schemes are in place to support smaller establishments and particular service categories. Understanding these exemptions and leveraging them effectively can help restaurant businesses manage their tax liabilities and compliance requirements efficiently, potentially influencing their financial planning and decisions regarding business loans.

Impact on Restaurant Business Owners

In the GST system, service tax and VAT will be combined into a single rate, but you may still see a service charge on your food bill. Below is a simple comparison of how your food bill will look before and after GST.

We have assumed that VAT is charged at 100% of the value with no reductions.

In this example, the total amount payable to the tax authorities under the current system comes to Rs. 950. But under GST, the amount you pay will be just Rs. 250, thanks to the reduced rates.

Conclusion

GST on restaurants has brought significant changes to the taxation system, affecting pricing, compliance, and overall operations. Understanding the GST rates, rules, and schemes, such as the composition scheme, is crucial for effective tax management. Utilising input tax credit provisions and leveraging exemptions where applicable can further optimise financial planning. For restaurant businesses, staying informed about GST rules and exploring options like business loans can support growth and sustainability in the competitive food service industry.