Impact of GST on Hospitality Sector: A Comprehensive Analysis

Provided that nothing contained in this entry shall apply to:–

(i) renting of rooms where charges are Rs 1,000/- or more per day;

(ii) renting of premises, community halls, kalian mandapam or open area, and the like where charges are Rs 10,000/- or more per day;

(iii) renting of shops or other spaces for business or commerce where charges are Rs 10,000/- or more per month.

(i.e. Hostel /Accommodation facility provided by an educational institution)

Nil (till 17/07/2022)

Nil (till 17/07/2022)

(= > Rs 1000 < Rs 2500)

(= > Rs 2500 < Rs 7500)

w.e.f. 01/10/2019 = 6%

{before 01/10/2019 = 9%}

w.e.f. 01/10/2019 = 6%

{before 01/10/2019 = 9%}

( = > Rs 7500)

{before 01/10/2019 = 14%}

{before 01/10/2019 = 14%}

TYPE OF SUPPLY

• Hotels supplying accommodation service often supply incidental services to its resident guests, viz. restaurant services, transportation services, sight-seeing, etc.
• Hotels to determine if their supply qualifies as independent supply, composite supply or mixed supply under GST because the same will determine the rate of GST applicable.
• GST treatment of such supplies will vary depending upon factors such as advertisements by hotel/online travel agents, booking confirmations, invoicing and accounting in the books of account. This has to be determined on a case-to-case basis.

CIGARETTES & AERATED BEVERAGES

• Certain products such as cigarettes and aerated beverages are also supplied by hotels. In such cases, evaluating whether the supply shall be treated as a composite or mixed supply is fundamental for discharging tax at appropriate rates.
• Supply of aerated beverages and supply of services by the restaurant are treated to be naturally bundled as supplied in conjunction to each other and hence is a composite supply of service classifiable under SAC 996331 chargeable at 18%.
• Sale of cigarettes is not treated as naturally bundled together with restaurant services. The services of the restaurant mainly involve serving of food and beverages alone in the normal course. Hence, supply of cigarette products is not a composite supply but a mixed supply chargeable at 28% and compensation cess at the rate applicable to cigarettes. Under GST, a mixed supply will have the tax rate of the item which has the highest rate of tax and thus cigarette will be treated as principal supply and 28% will apply on supply of restaurant services as well.
• The view is supported by ruling pronounced by AAR in the case of Mfar Hotels & Resorts (P.) Ltd. [2020] 120 taxmann.com 442 (AAR –TAMIL NADU) [12-05-2020].
• In cases where the supply of cigarette products is treated as composite supply and a part of restaurant services, compensation cess shall not be charged on the outward supply and thus the input tax credit of compensation cess paid at the time of procuring such items becomes a cost in the chain.
• Therefore, classification for supply of goods and services is quite essential to discharge appropriate tax. Any incorrect classification will result in short payment of GST thereby exposing business to liability in the form of tax, interest and penalty.

• Supply of alcohol for human consumption is outside the purview of GST, being a non-taxable supply.
• However, input tax credit in proportion to such supply of alcohol will be required to be reversed.

• Hotels often receive advance in terms of the timelines identified in the contract for bookings at a future date. However, the final invoice is issued at the time of check-out after completion of the event.
• Advance may be for services exigible to GST at different rates viz. 5%/12%/18%.
• Options may be explored by hotels to minimize cashflow on GST payment on advance.
• Cases where advance received has to be refunded, the refund amount shall be the net amount after deducting GST in cases where timeline to avail re-credit of GST has elapsed.

• Cancellation/no show charges may attract GST at the rate of 18% – being classified as services of ‘tolerating an act’ – as per a residuary entry of 18% in the absence of a specific entry.

• Complimentary stay (without charging any consideration)/Free Meals if provided to the hotel’s own employees/management may be susceptible to the levy of GST, considering that employers and employees are ‘related parties’ and supply between such ‘related parties’ is treated as taxable supply under the GST Laws, even though it is made without consideration. In such scenarios, appropriate valuation also becomes important. The view is supported by ruling pronounced by AAR in the case of Mfar Hotels & Resorts (P.) Ltd. [2020] 120 taxmann.com 442 (AAR –TAMIL NADU) [12-05-2020].
• Unlike employees of the hotel, auditors and consultants do not qualify as “related persons” of the hotel and thus one needs to analyze whether complimentary services to that class of persons qualify as a supply under GST law.

• Additional charges are collected by hotels for providing extra bed/ upgrade or accommodating an extra person.
• Such additional charge out results in the increase in transaction value of the unit of accommodation.
• Applicable GST rates are dependent upon the value of supply (tariff) which is a composite of total charges for the said accommodation including extra bedding, extra upgrade charges etc.
• The view is supported by ruling pronounced by AAR in the case of Jewel Classic Hotels (P.) Ltd. [2021] 124 taxmann.com 38 (AAR – HARYANA) [25-06-2020].

• For online platforms (such as makemytrip.com, hotels.com, Airbnb.com) which act as a conduit between the customer and the service provider i.e., hotels or accommodation providers, these will be recognized as electronic commerce operators (ECOs) who will have an obligation to collect tax at source (TCS obligations) and remit to the government.
• Further, such entities may also qualify as Online Information Database Access and Retrieval (OIDAR) service providers, and accordingly will have to take registration and remit tax.

• Credits in relation to major expenses for this industry i.e., works contract service and construction services are restricted and remain a cost in the system.
• For instance, lift/elevators shall not be entitled for input tax credit when used in construction of immovable property since they take the character of building itself. The view is supported by ruling pronounced by AAR in the case of Jabalpur Hotels (P.) Ltd. [2020] 118 taxmann.com 42 (AAR – MADHYA PRADESH) [08-06-2020].
• Input tax credit of GST paid on supply of wood, board, mica, tapestry, paint, polish and other consumables and on labour supply meant for repair of existing furniture and fixtures will be available to applicant- hotelier in accordance with provisions of section 16 of CGST/RGST Act,2017. {Rambagh Palace Hotels (P.) Ltd., [2019] 106 taxmann.com 172 (AAR – RAJASTHAN) [30-04-2019].}

• While the concept of pure agent as existing under Service tax, has been continued even under GST, there has been a divergence in the practice being adopted by travel agents while charging their customers and claiming this exclusion.
• In some cases, the travel agent only raises an invoice for its agency fees and the service provider (e.g., hotels/airlines) directly raise their invoices on the ultimate customer. In other cases, travel agents raise an invoice for both their agency fee and for the main service (e.g., accommodation service/transportation by air service), and the service provider (hotels/airline) raises its invoice on the agent.
• There remains an ambiguity with regards to which is a befitting structure fulfilling legal requirements.

• Services of short-term accommodation, conferencing, banqueting, etc. provided to a SEZ developer or a SEZ unit shall be treated as an inter- State supply.
• If event management services, hotel, accommodation services, consumables, etc. are received by an SEZ developer or an SEZ unit for authorized operations, as endorsed by the specified officer of the Zone, the benefit of Zero-rated supply shall be available in such cases to the supplier.
• The view is supported by ruling pronounced by AAR in the case of Carnation Hotels (P.) Ltd. [2019] 110 taxmann.com 196 (AAR – KARNTAKA) [16-09-2019].
• Hotels being unaware of the SEZ status of the customers may erroneously issue invoices levying improper GST and thus, hotels should ascertain whether the customer qualifies as an SEZ unit/developer at the time of entering into contracts with them/issuance of invoice to correctly collect and discharge GST.

GST TREATMENT OF STANDALONE R ESTAURANTS

• In order to mitigate the risk of standalone restaurants being perceived as one operating in the premises of the hotel and charged at 18%, one needs to ring fence the restaurant (operationally and physically) from hotel operations. Suitable steps may be prescribed upon analysis of the arrangement to mitigate risk of attracting higher rate of GST.
• Further, appropriate transition/structuring may also be required if the restaurant is expected to cater for room service to resident guests.
• This could facilitate supplies at a lower rate of 5% by such restaurants. Room service related supplies will need to be structured appropriately.
• If the registered person provides accommodation and restaurant services from one premise charging 18% rate of GST and opens a standalone restaurant in another premise, then the rate of GST to be charged shall be 5% with ITC reversal in case of common accounts being maintained. The view is supported by ruling pronounced by AAR in the case of Hotel Sandesh (P.) Ltd. [2021] 125 taxmann.com 134 (AAR – KARNTAKA) [26- 02-2021].

SUPPLY OF SERVICE

• Under GST laws, as per the definition for restaurant services, supply of food and drinks by way of or as part of any service or in any other manner whatsoever, is deemed to be a supply of service.
• Therefore, the place of supply and the rate of tax shall have to be determined accordingly.

• There arises ambiguity as regards take-away sales or drive-in sales and whether these will be seen as “by way of or as part of any service or in any other manner whatsoever”, to qualify as a deemed service.
• However, the service tariff code prescribed for restaurant services, specifically SAC 996331 is wide in scope and specifically covers “takeaway services, room services and door delivery of food” and it may be said that even take- away sales or drive-in sales would come within its ambit.
• The view is supported by ruling pronounced by AAR in the case of Ananya Goyal [2018 (14) G.S.T.L. 299 (A.A.R. – GST)]

• Under the GST regime, restaurants are liable to pay GST at the concessional rate of 5%, but with the condition that input tax credits are restricted.
• Input tax credits in relation to supply of food and beverages and outdoor catering is restricted unless output supply is also of same category of goods/services.
• Hence, except for the hospitality sector itself, for other businesses, credits in relation to such supplies is restricted.

• Certain restaurant operators have received an anti- profiteering notice requiring them to showcase how they have passed on the benefits under GST to the customers.
• Considering that this sector services the end customer [B2C], it is expected that this sector will face greater scrutiny from the anti- profiteering authorities, especially since there has been a change in rate applicable which should have had a consequential impact on the price of items supplied.

• If there are free items (e.g., toys) provided along with meal, the GST treatment of such a free item becomes an issue to be addressed. If GST becomes separately applicable to such free supplies, then it requires determination as to on what value should GST be levied.

• Sale of bought out products cannot be classified as restaurant services as an important element of service (preparation/customer order) is missing in the said transaction and the said arrangement will be treated as the sale of goods.
• Hence, the GST liability on sale of bought out products needs to be discharged at GST rate applicable to those individual goods/products.
• The view is supported by ruling pronounced by AAR in the case of Manoj Mittal [2021] 126 taxmann.com 48 (AAR – WEST BENGAL) [22-03-2021]and M/s Square One Homemade Treats [2019-TIOL-440-AAR-GST] [30- 09-2019].