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Service Tax on Hotels and Restaurants - Analysis

Madhukar N Hiregange 
on 06 July 2015

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Introduction

Under negative list based taxation, service tax is levied on all services other than those covered in negative list or a subject matter of exemption. The term service includes declared service. The declared service has an entry ”service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity”.

The definition of service excludes an activity which constitutes mere transfer, delivery or supply of any goods which is deemed to be a sale within meaning of clause (29A) of Article 366 of the Constitution.

The supply of food or drink is a deemed sale u/s 366(29A) of Constitution as follows-.

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration……

Whether levy of VAT and service tax on supply of food or drink is valid?

VAT is levied on supply of goods ie food or drink by way of or as part of any service for a consideration. In other words, VAT is levied even when food is supplied as a part of any service. Also there is no prescribed mechanism for arriving at the value of service portion of supply of food under VAT laws by which restaurant can pay VAT on balance. Therefore as it stands, VAT may need to be paid on entire supply of food including service portion.

Though VAT is levied on supply of food or drink, in the recent past, there had been decisions which had upheld levy of service tax on supply of food or drink. The Bombay High Court in Indian Hotels and Restaurant Association Vs UOI (2014-TIOL-498-HC-Mumbai-ST) held that Parliament is competent to impose Service Tax on Restaurants and hotels. Single Judge Kerala HC order cannot be accepted: Bombay High Court - Writ Petition dismissed.

In Indian Coffee Workers Co-Operative Society Ltd vs C.C.Ex.& ST, Allahabad [2014-TIOL-499-HC-All-ST]held that appeal against demand of service tax on the ground that the appellant has been paying VAT on sale of Foods and Drinks. The charge of tax in the case of VAT is distinct from the charge of tax for service tax. Demand of service tax upheld.

If the entire amount from guests is offered to VAT as a supply of food, levy of the service tax on the same amount would be amounting to a double taxation. The court in K. Damodarasamy Naidu v. State of Tamil Nadu [2000 (117) STC 1 (SC)] held that price provided for food could not be split up between charges for food or charges for services for the purpose of taxation.

In recent development in UOI vs Kerala Bar Association (2014-TIOL-1913-HC-KERALA-ST) division Bench of Kerala High Court holds States alone have power to impose tax on Hotels and Restaurants. Dismisses revenue appeal.

The levy under service tax could be against the basic principle that service tax and VAT are mutually exclusive. Once VAT is rightly levied on a transaction service tax cannot be levied on the same. This has been held in a number of decisions, important of which is decision in Imagic Creative case 2008 (9) S.T.R. 337 (S.C.) which was a Supreme Court decision.

Relying on the latest decision, hotels could stop paying service tax on the supply of food or drink. It should be kept in mind that in the past if a levy was struck down, the retrospective amendments were made, such as renting of immoveable property which was made liable retrospectively post the striking down of the levy. On the other side is the promise of the Government not to make any adverse retrospective amendment. Alternately could collect ST and pay under protest till clarity emerges.

At present, till the service tax levy on supply of food or drink is struck down by Apex Court as invalid, the department could demand that the hotel/restaurant having AC and supplying food or drink, should collect and pay ST on the service portion of the supply of food or drink. Whether cenvat credit can be availed by hotel, when it pays service tax on abated values of services?

What is cenvat credit Scheme?

Cenvat scheme is a beneficent piece of legislation and unless it is shown that the items are specifically excluded from the definitions of the terms “inputs”, “input service” or “capital goods”, Cenvat Credit cannot be denied.

It should be ensured that the credit are not restricted as per definition of inputs, input services or capital goods prior to availment.

The provider of taxable output services can avail eligible cenvat credit on inputs, input services and capital goods used for providing taxable services.

Whether credit on exempted services can be availed?

The cenvat credit cannot be availed on inputs, input services, capital goods which are used to provide exempted services. Rule 2(e) of Cenvat Credit Rules defines exempted services to mean

a. output services which are exempted from the whole of the service tax leviable thereon, or

b. services on which no service tax is leviable under section 66B of Finance Act or

c. the output services whose part of the value is exempted on the condition that no credit of inputs and input services used for providing such output service can be taken. But shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.’

Credit availment by hotels and restaurants

As far as the restaurant and also for accommodation service, on which a portion is exempted, there is no condition that credit of inputs and input services used for providing such output service cannot be availed. The cenvat credit of eligible inputs, input services and capital goods in relation to restaurant (other than inputs of Chapter heading 1-22 of Central Excise Tariff) can be availed fully if hotel were doing only that activity.

Though under earlier service tax law till 1.7.12, when abatement option was opted for taxable services such as catering, restaurant, accommodation services, mandap keeper services there was a specific restriction to avail the cenvat credit on inputs, input services and capital goods used for providing such taxable services. The credit related to restaurant services are restricted till 1.7.12 and could not have been availed at that time.

Present position on Cenvat credit availment is as follows for hospitality sector:

Taxable services

Taxable portion

Eligibility of Cenvat credit

Bundled service by way of supply of food or any other article of human consumption or any drink, 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 eg mandap keeper services

70%

(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.The credit on other inputs, input services and capital goods used for providing such taxable services can be availed.

Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

60%

CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.The credit on input services used for providing such taxable services can be availed.

Restaurant service.

40%

(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken.Thecredit on other inputs, input services and capital goods used for providing such taxable services can be availed.

Outdoor catering

60%

(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service cannot be availed. The credit on other inputs, input services and capital goods used for providing such taxable services can be availed.

       

The doubt in the industry is whether the abated portion is an exemption. Consequently the credit could be restricted. Some of the big players in hospitality sector are seen to be erring on side of caution even now. They are not availing credit on inputs and input services attributable to the abated values of services such as restaurant service.

In other words for example if credit like AMC, rentals of hotel premises is Rs. 100000, value of total amount charged by restaurant from customers is Rs. 100 Lakhs. The credit of merely Rs. 40000(40%) is being availed by such service provider as follows –Rs. 1 Lakh *40 Lakhs[taxable portion on which ST paid]/100 Lakhs. Though this is not prescribed by law, it is nevertheless being followed as a measure of abundant caution.

In opinion of paper writers eligible credit could be availed by the restaurant and accommodation services provider wef 1.7.12. However it is always advisable to intimate the methodology of availment of credit by RPAD letter to range to avoid later demands and litigation in this regard.

Liability for In Room Dining (Room Service)

There are demands by revenue that the rate applicable to accommodation (60%) is to be charged for room service. In the opinion of paperwriters, when the food is served in the room, service tax cannot be charged under the restaurant service, as the service is not provided in the premises of the air-conditioned restaurant. Also, the same may not be charged under the Short Term Accommodation head if the bill for the food is raised separately and it does not form part of the declared tariff. This was also clarified under the old law in Circular No. 139/8/2011-TRU dated 10.05.2011.

Most hotels are charging at the restaurant rate of 40%. There is a decision of the Uttarakhand High Court in Valley Hotel & Resorts vs. Commissioner, Commercial Tax, Dehradun 2014 (35) S.T.R. 28 (Uttarakhand) allowed the revision application filed by the assessee and held where the element of service has been declared, by which Service tax is levied on 40% of the billed value in restaurant, no VAT can be imposed thereon on such amount. Though this decision is available, there maybe difficulty in implementing in all States. In our view this decision may not be applicable unless similar view is taken in VAT, and there is a possibility that both VAT and service tax could be demanded on same amount .

Liability for Counter Sales

This is only a sale and the fact that at times some amounts beyond MRP is collected may not be relevant for levy of ST. The levy shall not cover mere sale of food [including counter sales] or by way of pick-up or home delivery, as also goods sold at MRP. It was similarly clarified at time of introduction of service tax levy on hotels and accommodation services in May 2011.

Conclusion

In this article the paperwriters have sought to examine the validity of the levy of service tax on the supply of food or drink, along with possibility of availment of cenvat credit. Legally there is a clear doubt that hotels need to collect however the hotels are averse to risk in addition to the fact that customers pay the ST and hotel can add to their margin due to credit availment. On ground level however both VAT and service tax would continue to be paid on 100% of base amount of bill, until a mechanism is put in place to deduct the VAT paid portion in the supply of food or drink.

CA Madhukar N.Hiregange

& CA RoopaNayak

For further queries send mail to madhukar@hiregange.com or roopa@hiregange.com.

Article based on book - Practical Guide to Service Tax published by Bharat Law House and adapted from article submitted to Ernachulam Branch of ICAI.  


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