GST on Hotels and Restaurants: Tax Structure and Provisions

Summary: The Indian tourism and hospitality sector plays a pivotal role in economic growth, contributing significantly to the country’s GDP and employment. Before GST, the industry was burdened with multiple taxes such as VAT, luxury tax, and service tax, leading to a high tax burden of 20-27%. The introduction of GST subsumed these taxes into a unified system, eliminating the cascading effect. GST rates for hotels and restaurants vary based on factors such as room tariffs and whether the establishment is air-conditioned. For instance, standalone restaurants are taxed at 5% without input tax credit (ITC), while hotels with room tariffs above ₹7,500 attract 18% GST with ITC benefits. Restaurants with turnover below ₹1.5 crore can opt for a 5% composition scheme but cannot claim ITC or pass the tax onto customers. Invoicing, place of supply, and time of supply provisions are governed by specific GST rules. Additionally, the hospitality sector must maintain comprehensive accounts and file GST returns, with larger establishments requiring audits. While GST applies to most services, alcohol remains under state VAT.

OVERVIEW OF HOSPITALITY SERVICE SECTOR

The Indian tourism and hospitality industry has emerged as one of the key drivers of growth among the services sector in India. The World Travel & Tourism Council (WTTC), the global authority on travel and tourism, has done a research study called ‘India 2019 Annual Research’, which shows that travel and tourism in India contributed 9.2% of the GDP and provided 42.7 million jobs or 8.0% of the total employment. Total contribution by travel and tourism sector to India’s GDP is expected to increase to US$ 275.2 billion in 2025. Travel and tourism is the third largest foreign exchange earner for India.

PRE-GST ERA

Hotel sector in India was taxed to Service Tax and VAT but allowed tax relief in the form of abatements vide Notification No. 26/2012-ST dated 20.06.2012 and exemption vide Notification No. 25/2012-ST dated 20.06.2012.

The hotel and restaurant industry was plagued by multiple of taxes i.e., Service tax, Luxury tax and VAT which ultimately results into cascading effect. The three taxes that were levied were VAT and luxury tax by the States and service tax by the Centre. The VAT rate varies from state to state (generally levied between 12% to 14.5%) on food & beverages, luxury tax depended on the room tariff levied on room sale revenue by the State (generally varies from Nil to 12%) and service tax varies on the type of service rendered at a uniform rate of 15% including cesses. The rate of Service Tax was 15% including the two cesses viz Swachh Bharat Cess (SBC) and Krishi Kalyan Cess (KKC). For hotels with declared room tariff in excess of Rs 1,000 per day and above, service tax was applicable at 60% of the room tariff in addition to VAT (ranging between 12 to 14.5%) and luxury tax wherever applicable. In case of restaurants on the F&B bills, service tax was applicable on 40% of the bill or effective rate of 5.8% apart from VAT @ 12 to 14.5%. In case of social functions (marriage, seminars etc.) the applicable service tax rate after 30% abatement was 10.15%.

Following table would indicate the abatements allowed to hotels and restaurants:

In case of restaurants, Service Tax was applicable only when such restaurants were air conditioned. Non-AC restaurants were not liable to Service Tax.

When the VAT, service tax and luxury tax were aggregated, the total tax impact goes up and falls between 20 to 27 percent. Further, as input credit from central taxes could not be set-off against VAT liability and vice-versa, this resulted in cascading effect leading to payment of tax on taxes. For example, VAT was levied on the total bill amount on which Service Tax had already been levied. That is how ‘turnover’ had been defined in VAT laws. This implies that VAT was paid on Service Tax also whereas Service Tax was not a part of turnover. However, Service Tax was not levied on VAT component.

Hotel paid Service Tax on various other services such as health club, spa, swimming pool, dry cleaning, business support services, internet, entertainment, tours & travel, works contracts etc.

RELEVANT PROVISIONS FOR THE SECTOR- POST GST ERA

Registration under GST

The requirement of registration in GST arises once the annual aggregate turnover of the business crosses the threshold limit as specified by the section 22(1) of the CGST Act, 2017 which is Rs 20 Lakhs in a financial year and that for special category state, the limit in Rs 10 Lakhs. The special category states are as under:

(1) Arunachal Pradesh

(2) Assam

(3) Jammu & Kashmir

(4) Manipur

(5) Meghalaya

(6) Mizoram

(7) Nagaland

(8) Sikkim

(9) Tripura

(10) Himachal Pradesh

(11) Uttarakhand

Restaurants availing Composition Scheme – 5%

Restaurants whose aggregate turnover is less than Rs 1.5 crore (Rs 1 crore in case of special category States) (earlier threshold was Rs 75 lakhs / 1 crore), can avail the benefits of “composition scheme” under section 10 of CGST Act, 2017. With this scheme, only 5% GST will be levied on the supply breaking-up into 2.5% CGST and 2.5% SGST.

This is the only service which has been brought under composition scheme. Otherwise composition scheme is available to traders and small manufacturers only.

This has to be paid out of the pocket by the restaurants as they are neither entitled to avail input tax credit of taxes paid on inputs such as raw materials or the service, nor they can recover the tax from their customers. Thus the restaurants opting for composition scheme cannot charge any tax in their bills. However, they have the option to pay full tax and avail credit open to them. Quarterly return [GSTR-4] to be filed by the hotels opting for composition scheme.

Invoicing under GST

With the advancement of GST from 01.07.2017, the brunt of various indirect taxes viz. Service Tax, VAT, Entertainment or Luxury Tax etc. have been subsumed into a single levy.

GST is levied in two parts i.e. CGST and SGST / UTGST, if supplied intra-state and IGST, if supplied interstate. Thus, the billers charge GST on their bills as per rule 46 of the CGST Rules, 2017.

TIME OF SUPPLY

As per Section 13 of the CGST Act, 2017, time of supply in case of services shall be the earliest of the following:

• the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
• the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier;
• or the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply.

Thus, time of supply in case of hotel and restaurant services shall be:

If invoice generated,

Time of issuance of invoice, or Time of provision of service Earlier Time of recording in books of accounts

If invoice not generated,

Time of receipt of payment, or Time of provision of service Earlier Time of recording in books of accounts

PLACE OF SUPPLY PROVISIONS

Supply of goods and services shall be identified on the basis of place of supply of services.

Place of Supply of Services where the location of the supplier or the location of the recipient is in India

Place of Supply of Services where the location of the supplier or the location of the recipient is outside India

INPUT TAX CREDIT (ITC)

Section 16 of CGST Act, 2017 provides that every registered person shall be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. This reduces the overall cost and thus reduces the burden of tax on the ultimate consumer.

Section 17(5) of CGST Act, 2017 inter alia, tells about the supplies credit on which is not available, which can, as relevant for hotels and restaurants, as follows:

As per section 17(5), Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of –

(b)(i) food and beverages, outdoor catering, beauty treatment, health service, cosmetic and plastic surgery except where an inward supply of goods or service or both of a particular category is used by a regis­tered person for making an outward taxable supply of the same cate­gory of goods or services or both or as an element of taxable compo­site or mixed supply.

By virtue of section 17(5), no input tax credit shall be permissible on “food and beverages” and/or “outdoor catering” unless the same is used for making outward supply. Therefore, the input tax paid on “food and beverages and outdoor catering” shall be allowable only if the same are used for making taxable “outward supply”

REVERSE CHARGE MECHANISM

Reverse Charge Mechanism under section 9(4) of the CGST Act, 2017 is not applicable to restaurant industry and thus, no tax under the mechanism is to be paid.

However , few services in hotel industry including security services and legal services are taxable under reverse charge mechanism.

ACCOUNTS & RECORDS

Under GST, the activities of manufacture, provision of taxable service and sale of goods have a common law and hence, businesses can now maintain consolidated information which was maintained separately earlier. Under GST, every registered taxable person is required to maintain the following accounts:

1. Production or manufacture of goods;

2. Inward and outward supply of goods or services or both;

3. Stock of goods;

4. Input tax credit availed;

5. Output tax payable and paid; and

6. Such other particulars as may be prescribed

Every registered person is required to keep and maintain account for five years from the due date of filing annual returns for the year to which the account and rec­ords pertain.

In addition to maintaining the accounts specified above, a registered per­son, whose turnover during the financial year exceeds Rs. 2 crore / 5 crore, is required to get the accounts audited by a chartered accountant or cost accountant and submit a copy of the audited annual accounts and a reconciliation statement in form GSTR-9/GSTR-9C.

RETURNS

Hotels / restaurants, other than opting for composition scheme, are required to file GSTR-1, GSTR-2 and GSTR-3. Also, a monthly summary return called GSTR-3B is to be filed by the taxpayers till December, 2017.  These will be filed by 20^th of the following month.

These returns have to be furnished as per the timelines being notified.

CLASSIFICATION & TAXATION PATTERN

GST on comestibles served in Restaurants / Food Suppliers

Restaurants, with or without dining places with proper sitting, are required to charge GST at the rate as specified by the CBIC vide Notification No. 11/2017-Central Tax (Rate) as amended on the products supplied by them.

The GST rates such restaurants and food suppliers are tabulated below:

It is to be noted that alcohol is outside the scope of GST and State VAT is applicable on the same.

GST on Accommodations in Hotels

The GST rates applicable for accommodation in hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes depends upon value of supply declared by them.

Addition­ally, they will be able to claim input tax credit in respect of the services rendered which reduces the overall impact of tax on the consumer.

The GST rates on such accommodations can be summarized as under :

W.e.f. 18.07.2022

 W.e.f. 01.10.2019

Upto 30.09.2019

What is Declared Tariff?

• Declared Tariff as defined in clause 2(w) of N.No. 09/2017-Integrated Tax (Rate) includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.
• Such tariff can be declared anywhere, for example, on the websites through which customers can book the room or be printed on tariff card or displayed at the reception.
• In case different tariff is declared at different places, the highest of such declared tariffs shall be the declared tariff for the purpose of levy of GST.
• Further, if different tariff is declared for different seasons or periods of the year, the tariff declared for the season in which the service of accommodation is provided shall apply. But it can be noted that declared tariff at the time of supply would apply for the purpose of GST.
• In case an upgrade is provided to the customer for a lower rate, then the tariff declared for such upgrade shall be used for the purpose.

(Source: Tweet FAQ’s as clarified by GOI)

Notification No. 13/2018-Central Tax (Rate) dated 26.07.2018 (Effective from 27.07.2018) read as under:

“(b) in items (ii), (vi) and (viii),- (A) for the words “declared tariff” wherever they occur, the words “value of supply” shall be substituted;”

Thus, w.e.f. 27.07.2018, GST Rate on hotel room tariff shall be determined on the basis of value of supply i.e. value actually charged in the invoice instead of declared value / tariff.

Levy of service charge despite GST is not valid

The Ministry of State for Consumer Affairs, Food & Public Distribution has clarified that charging of service charge from consumer by hotel/restaurants is not valid. As per guidelines issued in this respect, service charge is optional and payment of it depends entirely upon the discretion of the consumers.

(Source: Press release dated 05.02.2019)

GST on rent-a-cab services provided by hotels

Some hotels also provide cab services to its customers as an additional perk. The rate of GST and input credit available thereof can be summarized as under:

GST on foreign currency exchange services

Due to large number of foreign customers, most of the major players in the hospitality industry also provide foreign currency exchange services to its customers. GST on such service is levied at the rate 18% and the value of supply may be determined as per the clause 32(b) of the CGST Rules, 2017 at the option of the hotel, but the option will not be withdrawn for the remaining part of the financial year. Such valuation is summarized as under :

Other services provided by Hotels and Restaurants

Apart from aforementioned services, hotels provide a variety of other services to attract more and more customers, applicability of GST rate on which can be summarized as under:-

Relevant judicial pronouncements / advance rulings under GST

• In Kundan Mishthan Bhandar  (2019) 105 taxmann.com 364 (AAAR, Uttarakhand), the Appellate Authority for Advance Ruling, Uttarakhand held that in case of sale of food items from restaurant, GST rates on restaurant service will be applicable on all such sales and ITC will not be allowed. In case of sale of those items from sweetshop counter it will be treated as supply of goods and GST rates of the respective items being sold will be levied and ITC will be allowed on such supply.
• In Arihant Enterprises (2019) 104 taxmann.com 230 (AAR, Maharashtra) , the Applicant purchases ice-cream from its franchiser and resells the same in wholesale and retail sale packages. The Applicant sought advance ruling on whether supply of ice-cream by it from its retail outlets would be treated as supply of ‘goods’ or supply of ‘services’ or a ‘composite supply’? The Applicant submitted that it exclusively deals in the ice-cream manufactured by the franchiser and sells the same to its customers without any further processing or chemical change. The customer places the order from the menu and ice-creams are sold by it either in scoops, cones or after being topped with fruits at fixed rates.      The Authority observed that as per the CGST Act, 2017 ‘service’ is defined as anything other than goods for which a separate consideration is charged. In this case no extra money is charged from the customers for ice-cream consumption as they are free to consume the same either inside or outside the outlet. Also, no serving or dining facility is provided by the Applicant. Therefore, there is a transfer of title in ice-cream from the Applicant to its customers and, therefore, as per the CGST Act, 2017, the sale of ice-cream from the retail outlets by the Applicant is to be treated as supply of goods.
• In Coffee Day Global Ltd., In re (2018) 97 taxmann.com 426 (AAR, Karnataka), where the assessee is in the business of running restaurants under the name and style of Cafe Coffee Day (CCD) which serves the non-alcoholic beverages and food items, the Authority for Advance Ruling held that the explanation given in Notification 46/2017- Central Tax (Rate) clearly stipulates that ‘…..shall attract central tax at the rate of 2.5% without any ITC’. Therefore, the CCD is liable to pay the GST at the rate of 5% without ITC.
• In Hatsun Agro Product Ltd., In re (2019) 110 taxmann.com 287 (AAR, Karnataka), the Authority held that supply of ice-creams and other food items as per customer’s orders served in outlet is a ‘composite supply of food and beverage services’ & is taxable at 5% GST.
• In Safari Retreats (P.) Ltd. v. Chief Commissioner of Central Goods & Service Tax (2019) 105 taxmann.com 324 (Orissa), where the petitioner was engaged in constructing shopping malls for the purpose of letting out those on rental basis. Inputs in the form of Cement, Sand, steel, electric equipments and services in the form of consultancy, architectural, legal services, etc., were required for construction purpose. Petitioner had paid huge amount of GST on inputs .

The petitioner was informed by the GST authorities that it could not avail of benefit of input tax credit paid on the purchase of input material and services used for the construction of shopping mall for set-off against GST payable on rent received from the tenants of the shopping mall.

The petitioner had filed writ petition in the High Court of Orissa contesting that the input tax credit should be allowed to him.

The High Court observed the condition imposed as per the provisions of blocked credits for immovable property under the CGST Act, 2017, provides that input tax credit is not available when the immovable property is constructed ‘on his own account’ i.e. the taxable person on whose account the immovable property is constructed. This condition cannot be applied in cases where construction of immovable property is intended for letting out.

In the instant case, the shopping mall which the petitioner was constructing was neither intended for sale nor on his own account but was ‘intended for letting out’. Therefore, narrow interpretation by the department could not be accepted as the petitioner was retaining the property not for its own purpose but to let out the same. It was held that the petitioner would be allowed to set off the input tax credit on the goods/services used in the construction of mall from the GST payable on the rental income received.

Conclusion

Liquor / alcoholic beverages have been kept out of GST. Excluding it, defeats the very purpose of uniform single tax structure. Consolidation of taxes leads to greater transparency and will help guests and buyers understand overall costs.  Hopefully, GST is the pinnacle which aims at evolving an efficient and harmonized consumption or destination based tax system and removes the problems faced by the sector leading to cost optimization and free flow of transactions.