Introduction: This article is for the suppliers engaged in supply of food and beverages by way of restaurant, eating joint, mess, canteen, and those located in hotels, inns, guest houses, clubs etc. meant for lodging purposes.
1. vide Notification No. 11/2017-Central Tax (Rate) dated 28 June 2017, effective from 1 July 2017- The supply of accommodation, food or beverages was differently categorized and charged at different rates as-
a) Not having facility of air - conditioning or central air -heating in any part of the establishment, at any time during the year nor having license or permit to serve alcoholic liquor- 12%
b) Having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year - 18%
c) Having license or permit to serve alcoholic liquor for human consumption - 18%
d) Accommodation having declared tariff of one thousand rupees and above but less than two thousand five hundred rupees per unit per day or equivalent- 12%
e) Accommodation having declared tariff of two thousand five hundred rupees and above but less than seven thousand five hundred rupees per unit per day or equivalent- 18%
f) Accommodation having declared tariff of seven thousand and five hundred rupees and above per unit per day or equivalent- 28%
g) Outdoor catering (whether or not alcoholic liquor for human consumption)- 18%
h) Supply of goods, including but not limited to food or any other article for human consumption or any drink (whether or not alcoholic liquor for human consumption), in a premises (including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises- 18%
i) Accommodation, food and beverage services other than above- 18% They were entitled to get Input tax credits.
2. Notification No. 46/2017-Central Tax (Rate) dated 14 November 2017, effective from 15 November 2017- has made few amendments with regard to changes in categories-
a) All Restaurants - 5% with no ITC
b) Restaurants within hotels, inns, guest houses etc. (room tariff <7,500)- 5% with no ITC
c) Restaurants within hotels, inns, guest houses etc. (room tariff >7,500 ) - 18% with ITC
Example: A restaurant in a five star hotel having declared tariff of Rs. 8500 per unit per day would charge @ 18% with ITC on restaurant service while it will charge 28% on room rent service.
All other categories attract the same rate of tax as prior to the said notification.
1. No ITC: The credit of input tax charged on goods and services used in supplying the service cannot be availed. For the removal of doubts, it has been mentioned in the notification that goods include capital goods. Meaning thereby that input tax paid on goods including capital goods and services cannot be availed. But there may be cases where the service provider has credit of input tax charged on goods or services used partly for supplying such service and partly for affecting other supplies eligible for input tax credits.
For that matter, the credit will have to be reversed assuming as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder. E.g. restaurant providing outdoor catering along with normal restaurant services will require to reverse proportionate credit.
2. Outdoor catering/ Pandal, Shamiana functions: The rate of tax on outdoor catering is intact i.e. 18% with ITC. The restaurants providing outdoor catering also, should take due care to differentiate the input taxes on inputs for restaurant services and other supplies and reverse the ineligible credit. Otherwise, they can treat it as separate business verticals and get separate registrations in GST. The compliance costs would definitely increase with that
3. ITC to be reversed: The input credit cannot be availed from 15 November 2017 onwards but the suppliers have already availed credits on stock lying with them as on 14 November 2017. Do they need to reverse the credit for the stock? The notification is silent on this aspect.
4. Interstate stock transfer:
Raw material transfer: In centralized purchasing systems, stock of uncooked or raw food is transferred interstate from one location of supplier to another. The rate of tax to be applied based on the items supplied or the rate on restaurant services is to be applied straightaway? One school of thought says that the supply raw food to own branches interstate should be seen as trading activity. Therefore, the rate applicable on each item should be charged rather than blanket rate of 5%. If this argument is maintainable then the branch supplying the goods is entitled to input tax credit. While the recipient branches cannot get ITC and input taxes paid will add to their cost.
Semi cooked transfer: Semi or partially cooked food is transferred interstate from one branch to another. The food cannot be consumed by humans in that form. The rate of tax to be applied on semi cooked food is not mentioned anywhere. Prior to the notification also, the rate was not defined but there was no limitation on ITC. If restaurant rate @5% is applied, the tax paid on transfer of food will add to the cost of supplier.
5. Cascading effects:
a) Increased cost: The input tax credit accounts for 3%-4% of a restaurant's profits, according to Federation of Hotels and Restaurants Association of India. With no ITC, the cost of restaurants would definitely increase. Restaurants located in high-rent areas - which attract a high Goods and Services Tax rate of 18% on commercial rents - may be hit the hardest.
b) Menu prices to rise: The restaurant owners may be thinking about raising prices on the menu as a result of the government's decision. The customers would still be paying the same amount as the lower tax rate would balance out the higher food prices.
c) No invoice business: Buying in cash without bills may be encouraged in order to save on input tax costs.
6. Anti-profiteering: Restaurants were not passing on any benefit of input tax credit to consumers under GST, this was the argument given by government for withdrawing ITC from restaurant providers. The anti-profiteering committee may be eyeing on increase in prices on menus as well.
7. Input credit reflecting in GSTR 2A: Since the restaurant service providers are registered, their purchases will reflect in GSTR 2A as the suppliers will file GSTR-1. Though they are denied ITC but still they would be required to accept/reject the entries in GSTR-2A. Other option to avoid this exercise is not to provide GSTN to the suppliers and let them treat you as unregistered.
Disclaimer: The article contains personal understanding and opinion of the author which may not be reproduced or claimed anywhere.