Saturday, November 18, 2017

Increase in Prices After GST Reduction

Arun Jaitley announced the reduction of GST for restaurants from 18% to 5% starting Nov 15th. The above receipts are before and after Nov 15th. From the receipts, it looks like, Sangeetha Restaurant charged extra instead of reducing the tax. But, actually, Sangeetha Restaurant did correctly. The tax did not reduce. The tax got increased for all the restaurants.

GST has a concept of Input Tax Credit. For example, if you buy a product for Rs.100 and paid 18% GST, and if you are selling it for Rs.150, you can pay tax only for Rs.50. For Rs.100, for which tax already paid, you don't need to pay because of Input Tax Credit.

Starting Nov 15th, Union Government abolished Input Tax credit for restaurants. But, the tax got reduced to 5%. It means, if a restaurant is buying raw materials for Rs.100 and paid 18% GST, and if they are selling it for Rs.125 (Rs.100 Base Price + Rs.18 GST + Rs.7 Profit = Rs.125), then they have to pay 5% GST for Rs.125, and not just on the profit of Rs.7.

In the above receipt of Sangeetha Restaurant, they charged Rs.125 before Nov 15th, and charged Rs.130 after Nov 15th.

For example, before Nov 15th, if Sangeetha was paying Rs.100 (+ GST 18%) for raw materials, and other expenses, and if they were charging Rs.6 profit, then the total amount would be Rs.125. After Nov 15th, since there is no input tax credit, they have to pay 18% for the GST for Rs.100. Then along with that, for the entire amount, they have to pay additional 5% GST. In that case, the total amount is Rs.100 (for raw materials) + Rs.18 (GST on raw materials) + Rs.6 (Profit of Sangeetha) + Rs.6 GST (5% of Rs.100+18+6), which is Rs.130. If Sangeetha was paying less than 18% GST on the raw materials and other expenses, then the total amount could be less.

It looks like, Sangeetha was unable to explain Input Tax Credit, and they started giving discounts after they got bad name of increasing the prices after pseudo decrease in the prices.

What I hate is, Arun Jaitley increased the prices, but, they are propagating as if they decreased the prices.

Courtesy: Jeevanram Kasiviswanathan