Service tax not the best topping for your pizza

It is the fear of demand being dampened due to service tax that the food and beverage players are wary of going in for a periodic hike in coming months.

Published: 17th March 2013 09:23 AM  |   Last Updated: 17th March 2013 11:15 AM   |  A+A-

Hooked to burgers and pizzas or like grabbing a quick bite at a fast food restaurant? Well get ready to pay more at the quick service restaurants (QSRs) such as McDonalds, KFC, Pizza Hut and Dominos Pizza from April 1. However this Sunday morning we give you an appetising piece of news too. Looking at the increased tax burden on the consumer, food and beverage players, that went for at least two price hikes last year and some of them reduced portions, are looking at innovative ways to tackle high input costs rather than burdening the consumer further. So don’t expect an immediate hike in the price of your favourite chicken burger or family size pizza (other than the service tax), as QSR’s and casual dining restaurants wait-and-watch while you digest the service tax increase.

As per a report by Franchise India the current market of Indian restaurant industry is pegged at Rs 75,000 crore and is projected  to reach Rs 1,37,000 crore in 2015, registering a growth of 17 per cent per year.

Taxing time for Consumers

Eating-out is set to become expensive as a service tax of 12.36 per cent has been levied on all AC restaurants in this Union Budget. While in last budget the service tax was levied on restaurants that have licence to serve liquor, now even those that don’t have been brought under the ambit.

“The government gets more revenue. But consumers will now have to shell out more. This will definitely have an impact on consumption and people will definitely cut back on eating-out which will in turn affect our business,” said Vikram Bakshi, managing director, McDonalds (North and East). It was because of the higher taxes that McDonalds starting displaying its prices tax-exclusive from the year 2010.

To give you a quick idea of how much you will ending up paying more here is the fineprint. The service tax is about 12.36 per cent, but is applicable on 40 per cent of the bill in an AC restaurant, that don’t serve alcohol, so an effective increase of 4.956 per cent is what you will pay on the total bill. Looking at an average cheque size for a pizza you will shell out Rs 10 to Rs 50 more.  “Poor customer sentiment could have short term impact on consumption in restaurants across the spectrum,” says Virag Joshi, president and CEO, Devyani International Limited (DIL). RJ Corp’s company DIL operates KFC, Pizza Hut and coffee chain Costa Coffee in India. It also runs South-Indian cuisine fast food restaurant brand Vaango.

It is this fear of demand being dampened owing to the service tax that the players are wary of going for a periodical hike in the food items in the coming months. While fine dining restaurants might not feel the pinch, it’s the QSR’s and casual dining restaurants that are set to be impacted as they are frequented by middle class. Also as this class is more price-sensitive as compared to those who revel in fine dining experiences.

“Many of the restaurants that have now come under the ambit are serving meals at very affordable prices. The high tax burden of VAT and service tax combined will now range between 17-25 per cent of the bill value,” says Samir Kuckreja, President National Restaurant Association of India (NRAI).

Getting the menu right

For India’s Rs 75,000 crore-restaurant industry it’s a double whammy. On one hand the tax component makes it less lucrative for consumers to eat-out and on the other the input costs, including food prices, are rising fast for them. So the restaurateurs are looking at menu tweaks and adopting innovative ways to tackle high input costs rather than a downright increase in prices. “Input costs are constantly on a rise. To keep cost of ingredients in check we are using more seasonal ingredients. We don’t want to keep hiking our price, even though we have seen increase in the price of chicken and mutton and also our packaging costs have gone up. The service tax for now is enough of a burden for consumers,” says Rohit Aggarwal, executive director, Lite Bite Foods. Lite Bite foods is promoted by Aggarwal and Amit Burman and runs brands such as Street Foods of India, Zambar, Fresc Co and also Subway outlets.

Joshi of DIL also rules out a price hike for KFC, Pizza Hut and Costa Coffee. “DIL is reviewing every cost of the business and looking at realigning the organization structure to the business needs and simultaneously looking at ways to increase the top line to cover the high costs.

We are not looking at hiking prices or reducing portion size. We want to grow the top line by adding new products in the menu,” he observes.

So when the check comes at a restaurant the tax component will dampen your mood, the menu for now will continue to look the same.

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