Last updated: January 28th, 2020 4:43 PM

Starting a Restaurant in India

Starting a restaurant in India remains as one of the successful most businesses today. Furthermore, the restaurant business in India is one of the fastest-growing industries. The successful growth rate occurs due to urbanisation and a fast-growing middle class. The food and service industry is currently estimated at 75,000 crores and estimated to reach 1,37,000 crore in the year 2015. The report was produced by the Indian Restaurant Congress in 2013. With the rising disposable incomes, increasing population of youngsters, growth of tier II and III cities increases the urge to eat outside home. Hence, the growth of the restaurant shall increase in the years to come. This article briefly elaborates on the rules, regulations and licenses required for starting a restaurant in India.

Choice of Business Entity

Firstly, to start a restaurant, the entrepreneur can choose a business entity. Choosing an entity remains as one of the primary legal/financial decision. The entrepreneur can choose Proprietorship or Partnership for agreement. Further, the individual can also choose Limited Liability Partnership, Private Limited Company or One Person Company. Each business entity has its own unique advantages and the best fit for your business will be determined based on the number of partners/investors, size of business and future plans.

Further, with the recent introduction and low incorporation cost for Limited Liability Partnership's and One Person Company in India, it is no longer advisable for entrepreneurs to start a restaurant business as a proprietorship/partnership firm. Proprietorships and partnership firms do not provide limited liability, continuous existence or separation of business/personal assets when compared to Limited Liability Partnership, One Person Company or Private Limited Company. Therefore, it is advisable for a restaurant business to be started as a Limited Liability Partnership or One Person Company or Private Limited Company.

In instances where two or more persons come together to start a restaurant, Limited Liability Partnership or Private Limited Company acts as a very good option as these types of business entity are an association of two or more people. In case the restaurant will be owned and managed by a single entrepreneur, an One Person Company would be ideal or the single entrepreneur can enter into the business along with a family member (i.e., wife/husband, brother/sister, father, mother, relative) and opt for an LLP or Private Limited Company.

The annual sales turnover of the restaurant business in the first few years after inception will be a key indicator of the size of the business. In case the restaurant crosses annual sales of more than Rs.40 lakhs in the first few years, we recommend that the business be started as a Private Limited Company or One Person Company. In case, the annual gross sales of the restaurant business will not exceed Rs.40 lakhs or the capital contributed towards the business will not exceed Rs.25 lakhs, an LLP is advisable as LLPs with less than Rs. 40 lakhs of sales and less than Rs.25 lakhs of capital contribution do not have to have its accounts audited.

In addition to the number of partners/investors and the size of the business, future plans also play a major role in deciding the type of business entity to use for the restaurant business. In case, the entrepreneur plans to raise bank loan or private equity, the entity shall choose Private Limited Company. As Private Limited Company's ownership is decided by shareholding and the shares of a private limited company can be diluted to raise capital for the business. Also, in case the entrepreneur has plans to establish a chain of restaurants or create a franchising model, a Private Limited Company is recommended.

Food Business Operator License for Starting a Restaurant in India

The Food Safety and Standards Act, 2006 necessitates a Food Business Operator license for anyone involved in the production, processing, import, distribution and sale of food product within India. Therefore, all restaurants need to obtain a Food Business Operator license from the Food Safety and Standards Authority of India. The purview for licensing restaurants fall under the state-level licensing authority and can be easily obtained prior to starting the operations of the restaurant. The food business operator license is granted for 1 year and is renewable.

Shop and Establishment License

The Shop and Establishment Act is regulated by the Department of Labor and regulates premises wherein any trade, business or profession is carried out. This act regulates areas such as working hours, rest interval for employees, opening and closing hours, closed days, national and religious holidays, overtime work, rules for employment of children, annual leave, maternity leave, sickness and casual leave, etc., Shop & Establishment License can be obtained by applying to the State Chief Inspector of Department of Labor.

Service Tax Registration for Restaurant

The 2012 Budget levied service tax on all air-conditioned restaurants that serve liquor. The 2013 Budget expanded the service tax applicability to all restaurants that are air-conditioned. Therefore, all restaurants that are air-conditioned are required to obtain service tax registration if their annual sales will be more than Rs.10 lakhs. Currently, the service tax is chargeable at 4.94% in air-conditioned restaurants.

VAT Registration for Restaurant

VAT is levied by the State Government on sale on any goods or items, and the food sold in a restaurant is liable to be taxed under VAT. Therefore, restaurants must obtain VAT registration from the State authorities. VAT is levied by the State Government and so each state government has different rates of VAT.

Trademark Registration for Restaurant

In case the entrepreneur has plans for opening a chain or restaurant or for investing a significant amount of time and money into branding, it is advisable to obtain a trademark registration. Trademark registration would provide ownership over the intellectual property created and help deter the use of the branding by competitors.

Bank Loan for Restaurant

Often times a bank loan is required for many entrepreneurs to start a restaurant, and there are many banks that are willing to lend. The sanction of bank loan for a restaurant business in India mainly depends on factors such as the proposed business model, the experience of promoter and collateral security offered. There are also schemes like the CGTMSE Scheme which provides loan without any collateral; in such cases, the proposed business model and experience of the promoter has to be very strong. Either way, it is recommendable to approach your nearest banker, discuss the business plan and explore ways to establish a relationship with the bank.

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