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Impact of GST on Hotel Industry

Jul 03, 2017

The Indian hospitality and tourism industry, which was pegged at US$ 136.2 billion at the end of last year, is one of the sectors which will see major changes after July 1st. The impact on the implementation of GST in India is going to make a see through change in the business process and pattern

Current situation

The hospitality industry, like every other sector in the Indian economy, pays multiple taxes (VAT, luxury tax, and service tax) in the existing indirect tax regime. A hotel where the room tariff exceeds Rs 1,000 is liable for service tax at 15 percent. An abatement of 40% is allowed on the tariff value bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12 percent to 14.5 percent) and luxury tax will still apply. However, for restaurants there is 60% abatement which means that the service tax is charged at an effective rate of 6% on the F&B bills, apart from VAT (12 percent to 14.5%). Bills for bundled services like social functions (seminars, marriage etc.), are taxed with an abatement of 30%. The cascading effect of the existing indirect tax regime where the end consumer pays a tax on tax, increases the end cost. Hoteliers and hospitality businesses do not get any input tax credit on the taxes they pay currently, as central taxes cannot be set off against state taxes (VAT) and vice-versa and also due to availability of abatement in the tax rates for the application of which non availment of input credit is a precondition

GST Scenario

Specific statutory provisions

The composite 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 (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration has been declared as supply of services vide entry no .6(b) of schedule II to the GST Act. Thus supply of food in restraints has been declared as service.

Effect of this change: In the earlier regime when it was considered as mixed supply of goods and services, VAT was levied on food charges and service tax at abated rates was levied considering the cascading effect on levy of VAT on the sale of food. Now since the whole activity has been declared as a service, the tax has to be charged at peak rates with out abatement. Both CGST in the place of service tax and SGST in the place of VAT has to be levied on the total value of the bill which will make the service costlier in the eyes of the customer. However this increase in burden would reduce to a certain extent on the owners of the restaurants, mainly because of the availability of input credit.

General provisions

1. The threshold limit of aggregate annual turnover of Rs.20 lakhs for registration purpose is applicable for hospitality Industry as well. Thus Hotels and restraints with aggregate annual turnover of Rs 20 lakhs in the preceding financial year are exempted from the registration and payment of GST. Thus small tea shops and restaurants are covered by this general threshold exemption.

2. Composition levy: section 10 of the CGST Act provides for compounded levy of tax at the rate of 2.5% for service providers, if the gross annual turnover of the taxable person does not exceed Rs 50 lakhs. This provision is also applicable to the hotels and restaurants. However on availing this benefit, the owners of the restaurants would not be able to collect the tax from their customers and also they are not eligible for availing input tax credit on the goods and services used in providing the service. Thus this is a double edged sword.

3. Regular rates:

The levy of GST on hotels and restraints is discussed in the following section of this article with examples for the better understanding of the readers

Type I hotels and restaurants

India Tiffen Room Chennai is a non A/C/Restaurant famous for evening snacks, sweets and Tiffen items. They do have a small eat out place under fan but do not have permit for serving liquors.

Currently these categories of restaurants which do not have AC in their hotels are exempted from Service tax. Only VAT is applicable as per the state provisions of VAT.

GST Scenario

Option 1 Regular scheme

Tax rate applicable under GST: 12 % (6% SGST + 6% CGST) to be charged additionally in the bill. Suppose bill value is Rs 300 GST to be charged is Rs.36 total bill value will be Rs336.

Full Input tax Credit is available in respect of goods and services used for providing output service.

Option 2 – Composition Scheme

Rate of tax applicable : 5%(2.5 % CGST + 2.5% SGST) no tax to be charged in bill to the customer. Tax to be borne by the owner.

For the same example as above tax to be paid by the owner of the restaurant is 5% of the bill value ie Rs.15. total value of the bill to the customer is only RS.300 as the owner cannot pass on the tax to the customer. No input tax credit is available on the inputs and services used in providing output service.

Advice:

I. If the annual turnover of this restaurant is of the range between say 20 to 30 lakhs and the owner is not expecting any steep increase in turnover ib the near future he can jolly well opt for composition scheme for the following reasons:

For the owner of the hotel the differential cost on account of additional payment of duty is only RS 15 in the above case if he opts for composition scheme. As against this there will be substantial saving on account of additional manpower and technological requirement for getting GST compliant. Further in the place of around 37 returns to be filed in the Regular scheme, only four quarterly returns are required to be filed in the composition schemes. The two schemes are considered equal in terms of input tax credit as most of the items like rice, grains etc are zero rated there by no input credit on the inputs would be available. One substantial benefit is that he would be able to supply at cheaper rates when compared to like hotels there by attracting more customers.

a. However if the annual turnover of the company ranges between 40 to 45 lakhs and the owner of the company feels is expecting fast growth in turnover due to other reasons , then even if he opts for composition scheme, due to crossing of the threshold limit of Rs 50 lakhs turn over during the financial year at which time he is no longer entitled to pay tax under composition scheme and has to mandatorily switch over to regular scheme. In such cases it is better that the owner opts for regular scheme instead of the composition scheme.

Type II Hotels

Udupi lunch home Chennai is known for its mouth watering dishes and thali items. The ground floor portion of the restaurant is non a/c while in the top floor one can enjoy the tasteful dishes in a cool A/C environment with dim lights and channel music. The aggregate turn over of the hotel is around 1 crore during the last year. Shri X spend one evening with family in the first floor of the hotel and got a bill of Rs 1000 exclusive of taxes.

Current scenario

Currently such types of restaurants are required to pay service tax @6% after the abatement of 60% and No Input Tax Credit is available there on. VAT is applicable as per the state provisions of VAT.

GST Scenario

As per the decision of the GST council, Air-conditioned Restaurants and Restaurants with licence to serve liquor come under GST rate of 18%. A plain reading of this gives rise to two types of interpretation as follows:

1. Since there are two distinct portions one with A/C and other without A/c, it is logical that the customers who take services in the non air conditioned portion should not be charged with the higher burden of tax and should be charged the same rate of tax as is applicable to other non a/c restaurants . Thus those customers taking services at the non a/c portion would be charged with tax rate of 12% while the those take services at the top floor with a/c facilities should be charged with the higher rat of tax of 18%

2. In contrast to the above presumption, earlier in the Service Tax regime, while non a/c restaurants were exempted from payment of service tax, even if in any part of the restaurant if centralized air conditioning or air heating facilities are present the restaurant comes under the purview of service tax . On a similar footing even if air conditioning facilities are available in one portion of the restaurant if the whole restaurant comes under the higher rate of taxation of 18% , then even those who take food in the non a/c environment have to shed tax at 18%. This being the case in respect of majority of restaurants

This presumption is further supported by the fact that as per the GST council decision, air-conditioned restaurants and restaurants with licence to serve liquor come under GST rate of 18%. So even if it is a non a/c restaurant if they possess licence to serve liquor , whether they serve liquor or not the hotel comes under 18% tax rate. Thus even those persons who does not take liquor and take only food has to pay tax at 18% just because the hotel is in possession of licence to serve liquor.

Taking this analogy, even if the ground floor is non a/c, since the first floor is air-conditioned wherever one takes the services the tax rate to be charged would be 18%.

While the consumers have to shed 18% tax, the owner of the restaurant will be getting the relief of the input tax credit on the inputs and services.

But if this presumption is correct most of the customers of even ordinary restaurants would be severely affected.

Type III Out door catering services

Arusuvai catering services provides out door catering services in Chennai . apart from providing catering services for functions like marriages and other religious evens , they also provide catering services to the employees of corporates in their offices and factories.

Current scenario

Currently Outdoor catering is taxed at 9% of Service tax ( abated rate) and VAT as per provisions of respective state VAT Act.

Scenario under GST

Scenario 1.

If their aggregate annual turn over is less than Rs 20 lakhs, they would be exempted from registration as well as from the payment of tax. Thus they will not be charging their customers the GST which will make their services cheaper when compared to their counter parts with higher turnover. However this condition cannot prevail for long as increase in demand would lead to increased sales and thus, automatically the unit would come out of the threshold limit of Rs 20 lakhs.

Scenario 2.

GST at the rate of 18% of the value of services provided with full input tax credit. However since the inputs are mostly rice, grains etc which are zero rated, the availability of ITC does not substantially help the out door catering service provider. Thus the out door catering provider has to pay a GST of 18%(9% CGST +9%SGST) if it is intra state supply and 18% IGST if it is inter state supply.

Type IV Hotels

Restaurants in 5 star and above rated hotels

Taj coramandel is one of the premier hotels in Chennai with 5 star rating. They also have their restaurant in the premises of the hotel.

Current scenario

Currently these type of restaurants are required to pay service tax @6% and No ITC is available there on because of the availability of abated rate. VAT is applicable as per the state provisions of VAT.

GST Scenario

There is no possibility to think that, these restaurants would ever fall in the category of below Rs 20 lakhs aggregate turn over in a financial year. Thus though the threshold limit is available to these type of hotels as any other case, it is not operative in such cases. Similar is the case with the composition scheme.

Thus these restaurants have to pay 28% GST (14% CGST and 14% SGST) on their intra state supply of services and 28% IGST on their interstate supply of services.

Full Input tax Credit is available in respect of goods and services used for providing output service.

Hotels providing short term accommodation services along with supply of food

Type I lodging houses

Budget hotels with room tariff of less than Rs 1000

These category of hotels are exempted from the payment of GST.

Type II hotels with room tarrif ranging between Rs 1000 and above but less than Rs 2500

Current scenario

A hotel where the room tariff exceeds Rs 1,000 is liable for service tax at 15 percent. An abatement of 40% is allowed on the tariff value bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12 percent to 14.5 percent) and luxury tax will still apply. Not input service credit was allowed due to adoption of abated rates.

Scenario under GST

Such type of hotels attract a GST of 12%(6% CGST +6%SGST) with full input service credit. Thus even if we assume 12% VAT, then as against 21% tax paid earlier under the GST regime these types of hotels end up in paying only 12 % GST with the benefit of input tax credit also. This appears to be a cheerful situation for the owners of such hotels.

Type III Hotels

Hotels with room tariff more than Rs 2500 but less than Rs. 5000

Current scenario

Such hotels are liable for service tax at 15 percent. An abatement of 40% is allowed on the tariff value bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12 percent to 14.5 percent) and luxury tax will still apply. No input service credit was allowed due to adoption of abated rates. Thus the effective rate of tax paid works out to 21% with the minimum VAT of 12%

Scenario under GST

Such hotels are liable for GST of 18%. (9% CGST +9%SGST).as against the effective tax of 21% under the present indirect tax regime. Further the effective tax rte would further reduce due to availability of input credit for the payment of tax. Thus GST is beneficial to owners of such hotels as it reduces the over all tax burden and makes their services more competitive to their next higher level service provider viz five star hotels.

Type IV Hotels

Hotels with room tariff exceeding Rs 5000 per night per room

Current scenario

Such hotels are liable for service tax at 15 percent. An abatement of 40% is allowed on the tariff value bringing the effective rate of service tax down to 9%. The Value Added Tax (ranging between 12 percent to 14.5 percent) and luxury tax will still apply. No input service credit was allowed due to adoption of abated rates. Thus the effective rate of tax paid works out to 21% with the minimum VAT of 12%. Adding luxury tax it would further go up.

Scenario under GST

Such hotels are liable for GST of 28%. (14% CGST +14%SGST).as against the effective tax of 21% under the present indirect tax regime. Adding the luxury tax component, the tax rates before and after GST appears to be in the same range. Thus the owners of such hotels and their customers have no impact on account of introduction of GST.

This article was first published on LinkedIn by Geetha Varadarajan

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