Module 11

MODULE 11

TAX AND INSURANCE IN THE FOOD INDUSTRY

11.1 INTRODUCTION

The Indian government has come up with a plethora of reforms, with a foresight to eradicate
corruption from the market and add transparency to its operations. No reform in the recent
past has generated as much buzz as the Goods and Services Tax (GST).

Especially for food and beverages, its implications remain positive. Under the earlier system
of taxation, the restaurant sector was burdened with numerous high-costing taxes, charges
and cesses. On each and every food and beverages bill, the diner paid additional VAT as well
as service tax and service charge, not to forget the cesses. The VAT rates were generally
between 12.5-14.5 per cent as per the individual State VAT laws and abatement rate on
service tax on restaurant services was about 6%. Thus, the effective tax rate added up to
around 18.5-20.5 per cent (varying for state- to- states).1

With the execution of GST, all taxes form under a single bracket, adding uniformity to a
market plagued by unnecessary additional taxes. In context to restaurants, while they were
paying tax, a total of VAT at (12.5 per cent)+ Service Tax (6 per cent) + Service Charge (10
per cent) was applied on it.2

Under the new system, the restaurants are broadly divided into two categories:

§ Stand- Alone restaurants, and
§ Restaurants in Hotels

A Stand-alone restaurant includes eating joints, canteens, mess, and other such places which
do not have an attached lodging facility. The restaurants that fall under this category (both air
conditioned and non- air conditioned) shall charge 5% GST on all food and drinks. The 5%
GST rate shall be divided between 2.5% CGST (Central Goods and Service Tax) and 2.5%
SGST (state Goods and Service Tax).

The restaurants in hotels can further be divided into two sub categories,

1 GST effect: How GST will impact your restaurant bill starting tomorrow
http://www.businesstoday.in/current/economy-politics/how-gst-will-impact-restaurant-and-food-
billsy/story/255522.html
2 ibid

Page | 1

Declared Tariff less than Rs.7500 per night/ day
Declared Tariff more than Rs.7500 per night/ day
Any restaurant, canteen, eating joint or mess which is attached to a hotel or a lodging facility,
will fall under the category of restaurants within hotels. The GST rate chargeable in such
facilities will be based upon the maximum tariff, for a room, charged by the hotel. Even if
one of the rooms has a declared tariff of more than Rs.7500, the GST rate chargeable would
be 18%. But if the maximum declared tariff of all rooms in the facility is less than Rs.7500,
then the GST rates applicable in such restaurants will be 5%.
Along with the categorization of restaurants, the new system also withdraws the input tax
credit for restaurants where only 5% GST is charged.

11.2 INPUT TAX CREDIT
Input tax credit means at the time of paying tax on output, you can reduce the tax you have
already paid on inputs and pay the balance amount.
For example, ‘A’ buys a product or service from ‘B’, a registered dealer and pays applicable
taxes on such purchase. Now, when ‘A’ sells the product, he collects the respective tax from
the buyer.
‘A’ can then adjust the taxes paid at the time of such purchase with the amount of output tax,
i.e., the tax on sales and the balance liability of tax (tax on sale – tax on purchase) has to be
paid to the government.
Say a manufacturer manufactures a product and the tax payable on the output or the final
product is Rs.100. And the tax paid on input or the purchases is Rs.75. Now, the
manufacturer can claim the Input Tax Credit of Rs.75 and only has to pay Rs.15 in taxes.

Page | 2

11.3 NEUTRAL IMPACT ON FEW PRODUCTS
The impact of GST rates on farm products such as edible oils, tea and coffee is seen as
neutral, with no major impact on the end-prices for consumers, while a zero-tax on unbranded
wheat products such as atta, maida and sooji may make them cheaper.3

11.4 EFFECT ON LIQOUR
Alcohol for human use is outside the ambit of GST.
The only levy on liquor now is value-added tax (VAT) because GST is not applicable. This
varies from State to State. In Maharashtra, for instance, it is 5%. With the service tax gone,
liquor should get cheaper.
Liquor companies are expected to raise prices. And restaurants may be forced to follow a
suit.
While GST on their inputs is likely to raise their production costs, they will be unable to
claim any credit because sale and supply of alcohol is not within the GST.4

11.5 GST REGISTRATION
All business completing an assessable supply of the products or services under the GST
regime and whose turnover surpasses the limit of Rs.20 Lakh or Rs.10 Lakh , respectively, is
required to enlist as a normal taxable person. This procedure is of enrolment or registration is
known as the GST registration.

11.6 GST REGISTRATION TURNOVER/ TRESHOLD LIMITS
GST has two turnover limits:

3GST regime: Food industry happy at lower levy, but branded wheat players sore
http://www.thehindubusinessline.com/economy/gst-regime-food-industry-happy-at-lower-levy-but-branded-
wheat-players-sore/article9708208.ece
4 Soumya Gupta, GST: Eating out gets cheaper, but drinking out may not, Wed, Jul 05 2017. 03 00 AM,
http://www.livemint.com/Industry/beSZKiQamnS9RuoXSAGgAN/GST-Eating-out-gets-cheaper-but-drinking-
outmay-not.html?li_source=LI&li_medium=news_rec , last accessed on 5th July,2017

Page | 3

§ Businesses with a turnover exceeding Rs.20 Lakh per year for all Indian cities and
states, not including the North- Eastern states of the country.

§ Businesses with a turnover exceeding Rs.10 Lakh per year for the North- Eastern
states of India including Assam, Arunachal Pradesh, Himachal Pradesh, Manipur,
Mizoram, Meghalaya, Nagaland, Sikkim, Tripura and Uttarakhand.

Therefore, it is mandatory for any business to register under the GST regime if its turnover
exceeds the above mentioned limits. If a business operates from more than one state, then a
separate GST registration is required for each state. Also, if one company has multiple
business verticals in a state, then it shall have to obtain a separate registration for each
business vertical.

11.7. GST REGISTRATION PROCESS

For a person to get a GST registration, he or she has to go through the following procedure:

§ Logon to the GST online portal.
§ Fill PAN, Mobile No., E-mail ID and State in Part-A of Form GST REG-01 of GST

Registration.
§ The portal shall verify the details via an OTP sent to the provided e-mail address or

mobile number.
§ Fill Part-B of Form GST REG-01 duly signed (by DSC or EVC) and upload the

required documents specified according to the business type.
§ An acknowledgment will be generated in Form GST REG-02.
§ The GST officer shall then verify the application.
§ The office may also reject the application if they find any errors. You will be

informed about this in Form GST REG-05.
§ Then, within 7 working days a certificate of registration shall be issued by the

department after verification and approval in Form GST REG-06.

11.8 DOCUMENTS REQUIRED

The following are the mandatory documents required for GST registration in any state across
the country:

Page | 4

§ Provisional ID and password
§ E-mail address
§ Mobile number
§ Bank details such as Account number, IFSC code, etc.
§ Constitution of business
§ Appointment of authorized signatory
§ Photographs of promoters or partners or Karta
§ Copy of the opening page of bank passbook

In case of a Sole Proprietorship, the following additional documents are required,

§ Permanent Account Number (PAN of the proprietor.
§ Address proof of the proprietor.

If it is a Limited Liability Partnership (LLP), then the following additional documents are
require,

§ Certification of Incorporation
§ LLP Agreement
§ PAN of the LLP
§ List of the Partners
§ ID proofs of all the Partners
§ Address proofs of all the Partners

In case of a Partnership, the following additional documents are required,

§ PAN of the firm
§ Copy of the Partnership Deed
§ Partnership Registration Certificates
§ ID proofs of all Partners
§ Address proofs of all Partners

When a Private Limited Company is to be registered, the following additional documents are
required,

§ Certificate of Incorporation
§ Memorandum of Articles

Page | 5

§ Articles of Association
§ PAN of the company
§ List of Directors
§ Board Resolution
§ ID proofs of all the Directors
§ Address proofs of all the Directors

11.9 PENALTIES FOR DEFAULT
A guilty party not paying the tax or making a short payment needs to pay a penalty of 10% of
the tax amount due subject to at least Rs.10, 000. The punishment will be as high as 100% of
the tax sum the guilty party has tried to evade i.e., if there should be an occurrence of a fraud.

In any case, for other bona fide botches, the punishment is 10% of the total tax due.

11.10 GST REGISTRATION NUMBER
The GST registration Number or otherwise known as the GSTIN is a 15 digit identification
number that is allotted to each applicant. It provides a separate identity to each business that
is registered under GST. It is based on the PAN and the state code.
A GSTIN is mandatory for,

§ A business operating within a state with a turnover exceeding Rs.20 Lakh.
§ A business operating outside a state or between states. Even if the turnover is less than

Rs.20 Lakh.
§ A business engaged in E- commerce or in the provision of online services.

11.11 INSURANCE POLICIES IN THE FOOD INDUSTRY
Corporations facing business liability risks across numerous worldwide locations need a
reliable long-term partner with global reach. Insurance companies provide a wide range of
services from raw material suppliers to leading retailers and wholesalers, with the support of
an efficient team and expert consultants

Page | 6

Companies provide services from property and liability cover, through cargo and storage, to
specialized protection such as directors & officers or environmental liability. Products must
be offered for impartial risks, or as part of an overall global program covering exposures in
multiple locations:
Tailored services for the food & beverage manufacturing insurance industry, which are
available globally

§ Public, products and employers liability
§ Product tampering/contamination
§ Cargo and goods-in-transit (including storage and stock throughput)
§ Professional Indemnity
§ Directors and officers liability
§ Public Offering of Securities Coverage
§ Property (including physical damage from natural hazards such as flooding,

windstorm or earthquake)
§ Business interruption
§ Risk consulting
§ Business continuity support
§ Crisis management support.

Page | 7