HOW TO START A RESTAURANT IN INDIA?
The industry of food and beverages is amongst the fastest expanding industries in the country fuelled by urbanisation and the ever growing middle class. The food service sector is presently valued by the Indian Restaurant Congress (held in 2013), at around 75,000 crores and is expected to reach around 137,000 crores by the year 2015. With the growth in population, especially youngsters, increase in purchasing power of consumers, growth of tier II and tier III cities, there is an increasing demand for outside food making the restaurant industry grow continuously. The article focuses on the rules and regulations required to start a restaurant in India.
WHICH BUSINESS ENTITY MODEL TO GO FOR?
One of the basic decisions (legal/financial) to be made by the entrepreneur before starting a restaurant is to make a choice regarding the business entity i.e. a Proprietorship, Partnership, Limited Liability Partnership, Private Limited Company or One Person Company. Each one them has its own unique benefits and can be chosen depending on the scale of business, number of investors/partners and plans for the future. Proprietorship and Partnership firms are not generally chosen by people as they do not provide limited liability, continual existence or division of business or assets which are covered well under the Limited Liability Partnership or One Person Company. Therefore, it is suggested that entrepreneurs who wish to start a restaurant, choose the latter since it proves to be more sorted and profitable.
In situations where two or more individuals wish to start a restaurant together, a Limited Liability Partnership or Private Limited Company works the best. If the restaurant is owned and run by an individual, a One Person Company is a good option. The individual can also partner with a family member (i.e. spouse, sibling, parents or any other relative) and can choose a LLP or a Private Limited Company business entity.
The key indicator of a successful restaurant is the annual sales turnover in the initial few years of the start-up. If the gross annual sale of the restaurant in the first few years is estimated to be greater than Rs. 40 lakhs then it is recommended that the business should be registered as a Private Limited or a One Person Company. In case, the gross annual sale is expected not to be more than Rs. 40 lakhs and the capital contribution less than Rs.25 lakhs, it is suggested that the business be registered as a LLP since, audit of accounts would not be required in this situation.
In addition to the number of partners/investors and 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 has plans for raising a bank loan or private equity, a Private Limited Company is always recommended, 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.
WHICH LICENSES ARE REQUIRED TO START A RESTAURANT?
A FOOD LICENSE:
The Food and Safety Standards Act of 2006 makes it mandatory to get a Food Business Operator license for anybody who is associated in the production, processing, distribution, sale or import of any edible product within the country. Therefore, it is necessary to obtain this license from the Food and Safety Standards Authority of India. It comes under the purview of the state level authority of licensing and can be obtained easily before starting any restaurant related operations. It is valid for a year and can be renewed thereafter.
AN ESTABLISHMENT LICENSE:
The Department of Labour regulates the Shop and Establishment Act and its premises under which any profession, business or trade is operated. The act manages areas such as working hours, intervals for employees to rest and overtime work, operating hours, shut down days depending on national or other holidays, child labour rules and general or maternity or sickness etc. leaves. The license can be obtained through the State Chief Inspector of Department of Labour.
SERVICE TAX REGISTRATION:
The budget of 2012 made it mandatory for all air-conditioned restaurants that serve liquor to be charged with service tax. The following budget expanded the applicability of the same to every single restaurant regardless of the liquor factor. A restaurant is required to get a service tax registration if its annual sale is greater than Rs.10 lakhs.
The tax is levied by State Governments on the sale of any product including food that is sold in restaurants. Hence, it is mandatory for every restaurant to obtain a VAT registration from the respective State Authority which may vary from state to state.
If an entrepreneur wishes to start a restaurant or chain or wants to invest a significant quantity of money and time into branding, it is suggested that they obtain a trademark registration. The registration provides intellectual property ownership rights to the entrepreneur and helps avert the use of brand by other competitors in the market.
HOW TO GET YOUR RESTAURANT FINANCED?
Many times entrepreneurs need a bank loan to start a restaurant and banks indeed offer loans for the same. Getting a bank loan sanctioned depends on various factors such as the intended business model, promoter’s experience and the offered collateral security. A lot of schemes offer loans with zero collateral like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme within which it is necessary to have a strong business model and experience, if there is no collateral. It is recommended to approach a nearby bank in order to establish a relationship with the bankers and discuss the business plan further.
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