Starting a Restaurant in India

The food and beverages industry is one of the fastest growing industries in India spurred by
urbanization and an fast growing middle class. The food service industry is currently estimated at
75,000 crore and is estimated to reach 1,37,000 crore in the year 2015 by the Indian Restaurant
Congress held in 2013. With the rising disposable incomes, increasing population of youngsters, the
growth of tier II and tier III cities and increasing urge to eat outside of home, it is no wonder the
restaurant industry is growing and will continue to grow in the years to come. In this articles we look at
the rules, regulations and licenses required for starting a restaurant in India.

Choice of Business Entity

One of the first legal/financial decision to be made by the entrepreneur in the path to starting a
restaurant is to choose a business entity (i.e. Proprietorship, Partnership, 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 Partnerships 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 is 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 a 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 will gross an 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, a 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 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 bank loan or private equity, a Private Limited Company is always
recommended, as Private Limited Companys 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 restaurant or create a franchising model, a Private
Limited Company is recommended.

Food Business Operator License

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 & 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 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 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 restaurant will mainly depend on factors
such as proposed business model, 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 ways, it is
recommendable to approach your nearest banker, discuss the business plan and explore ways to
establish a relationship with the bank.