GST Compliance for Restaurants & Food Businesses in India

Running a restaurant or food business in India today goes beyond cooking and service — compliance with tax laws, especially GST (Goods and Services Tax), is a critical dimension. Missteps in GST compliance can lead to penalties, blocked input credits, or legal headaches. This blog explores the key GST rules, current rates, compliance best practices, and practical tips for food businesses and restaurants, in a clear and actionable way.

What is GST in the context of food services?

GST is a comprehensive indirect tax system that subsumes multiple older taxes like VAT, service tax, excise, etc. In the food and restaurant space, GST treats “restaurant services / food & beverage services” as taxable supplies. Depending on the nature of the business (standalone eatery, hotel restaurant, cloud kitchen, catering), different rates and rules apply.

Key GST Rates & Input Tax Credit (ITC) Rules for Restaurants

One of the trickiest parts of GST for food businesses is knowing when you can claim input credits (ITC) and when you cannot and what GST rate applies. Below is a breakdown of the prevailing regime (as of mid-2025) and recent changes.

Rate Structure (Pre-and Post-September 2025 Changes)

• Before the 2025 reforms, restaurant services often spanned multiple slabs (5%, 12%, 18%) depending on establishment type, hotel particulars, AC vs non-AC, etc.
  
  
• In September 2025, the GST Council simplified slabs and made a big change: restaurant meals were put under a flat 5% rate (removing prior distinctions) for most outlets, effective 22 September 2025.
  
  
• Under the new structure, essential unbranded/unpacked food items are now exempt in many cases.
  
  

Thus, as of late 2025:

Important note: Standalone restaurants (not part of hotels) in the 5% bracket cannot claim ITC on inputs (raw materials, utilities, rent etc.) as per Notification No. 46/2017 (Central Tax). 

Also, earlier distinctions such as charging higher GST for AC vs non-AC setups have been largely removed under the reformed slabs. 

Some Illustrative Cases & Product-wise Exceptions

• Pizza: The “pizza bread” component may attract 5%, but toppings may fall under 12% or 18% depending on ingredients and classification.
• Ice Cream: If sold in a restaurant under the same rate as the restaurant services, 5% applies (if in that bracket). But in outdoor catering, 18% applies. 
• Delivery / platform service charges: In some recent changes, food delivery services have new GST liabilities. For example, platform delivery charges, handling fees etc. may carry 18% GST.

GST Registration, Composition Scheme & Special Provisions

When is GST Registration Mandatory?

• Any food business whose aggregate turnover exceeds ₹20 lakh (₹10 lakh for special category states) in a financial year must register for GST.
  
  
• Even those below threshold may choose voluntary registration to enable ITC (if eligible).
  
  
• Businesses with multiple premises, interstate supplies, or online sales may be required to register irrespective of turnover.
  
  

Composition Scheme for Restaurants

• Under the Composition Scheme, small restaurants (turnover up to ₹1.5 crore) can pay a flat rate of 5% GST on turnover (without claiming ITC).
  
  
• Conditions include clearly indicating on bills “composition taxable person, not eligible to collect tax on supplies.”
  
  
• The composition scheme is simpler in compliance, but since ITC is disallowed, input costs are borne fully without credits.

E-Commerce and Food Delivery under GST

• From 1 January 2022 onward, under Section 9(5) of CGST Act, for restaurant services sold via e-commerce platforms, the e-commerce operator is liable to pay 5% GST on those supplies (in most cases).
  
  
• The sale value via those platforms still counts toward the restaurant’s aggregate turnover for GST thresholds.

Compliance Process & Best Practices

To ensure you stay on the right side of GST rules, here’s a compliance checklist and some best practices tailored for food businesses:

Invoicing & Billing

• Always issue tax invoices with correct breakup: taxable value, GST rate (CGST + SGST or IGST), and total tax collected.
  
  
• For composition scheme restaurants, mention “composition taxable person, not eligible to collect tax” on invoices and signboards.
  
  
• In the case of composite or mixed supplies (e.g. food + event services), apply the correct tax rate based on principal supply or highest slab.

Record Keeping & Digital Books

• Maintain purchase invoices, utility bills, rent contracts, capital goods invoices etc.
  
  
• Use accounting software integrated with the GST system for auto-reconciliation and easier return filing.
  
  
• Keep separate records for supplies made via e-commerce / aggregators.

Return Filing & Payments

• File GSTR-1 (outward supplies), GSTR-3B (summary return) and GSTR-9/9C (annual return) by due dates.
  
  
• In case of composition scheme, file CMP-08 form for tax payments.
  
  
• Pay correct GST on time to avoid interest or penalty.

Input Tax Credit (if ITC is permitted)

• Only claim ITC for inputs/services that are directly used in supplying the taxable service (subject to exclusions).
  
  
• Reverse or block ITC if inputs are used for both taxable and exempt supplies, if legally required.
  
  
• Ensure proper documentation and match with GSTR-2A/2B or vendor returns.

Audits & Advance Rulings

• Be open to GST audits by tax authorities; ensure all invoices and books are audit-ready.
  
  
• In complex or ambiguous cases (e.g. classification of food items, composite services), consider seeking Advance Ruling from AAR to reduce disputes.
  
  
• For example, the Gujarat AAR ruled that ready-to-eat packaged food bought externally and sold in restaurant premises may not qualify as ‘restaurant service’ under 5% rate.

Stay Updated with Notifications & Amendments

• Tax laws evolve. For instance, the 2025 reform simplified rate slabs and reclassified many items.
  
  
• Monitor notifications, especially for GST changes, classification, e-commerce rules, etc.
  
  
• For example, from 1 April 2025, multi-factor authentication (MFA) for all GST portal logins became mandatory.

Challenges & Pitfalls

Even with rules in hand, many food businesses face hurdles. Here are common pitfalls and how to avoid them:

1. Incorrect Classification
   Misclassifying a composite supply or product (e.g. toppings, condiments) can lead to wrong tax rates. Always analyze whether the supply is mixed or composite.
   
   
2. Trying to Claim ITC in 5% bracket
   Many restaurants mistakenly try to claim ITC even when they must operate in the 5% no-ITC bracket — this invites audit issues and reversals.
   
   
3. Inadequate Documentation for E-Commerce Sales
   If platform orders are not properly channelled or documented, you may lose track of GST liability or get penalized.
   
   
4. Mixing Personal and Business Expenses
   Avoid using business invoices for personal purchases restrict ITC only to business-relevant supplies.
   
   
5. Missing Deadlines & Late Filings
   Late returns or tax payments attract interest, penalties, or may block your input credits.
   
   
6. Ignoring Small Changes & Notifications
   Even minor policy tweaks or new clarifications (for example, on delivery charge taxation) can have material impact.

Strategic Implications for Restaurant Owners

Beyond compliance, restaurants should think strategically about how GST affects their operations and pricing:

• Menu Pricing Sensitivity: Since many restaurants can’t claim ITC, input costs (raw materials, packaging, utilities) are fully absorbed. This needs factoring into price margins.
  
  
• Operational Efficiency: Automating bill generation with correct GST breakup, and integrating ordering, billing, and accounting can reduce mismatch errors.
  
  
• Channel Optimization: Compare margin impact of direct dine-in vs aggregator sales, especially since aggregator commissions and delivery charges may be taxed.
  
  
• Cash Flow Planning: GST collection needs timely remittance; if many sales are via aggregators (who collect and remit), reconcile regularly.
  
  
• Advocacy & Industry Positioning: The restaurant sector has been urging the government to rationalize GST further, citing cost pressures.

Conclusion

GST compliance for restaurants and food businesses is a balancing act between understanding tax rates, correctly applying input credits (where allowed), and maintaining rigorous documentation. While the 2025 reforms have brought more simplicity (e.g. a flat 5% rate for many), pitfalls remain in classification, e-commerce tie-ups, and other nuanced rules.