IMPACT OF GST ON HOTEL INDUSTRY
GST (Goods and Services tax) is a vast topic of study but one thing is clear that now taxes will be simplified and will involve less documentation and save time. This simplicity of the tax should lead to easier administration and enforcement, thereby less administrators and reduction in manpower costs. Some business might benefit whereas others might feel the pinch.
The Hotel Industry was plagued by multiple of taxes i.e. Service Tax, Luxury tax and VAT which ultimately results into cascading effect. Goods and Service Tax (GST) is a destination based consumption tax which is a levy of tax on all goods and services with the objective of expanding the tax base through wide coverage of economic activities, mitigating the cascading effect, reduction of exemptions , enable better compliances etc. thereby resulting into formation of common national market for goods and services. The following article throws some light of its effect on the Hotel industry
Taxability - Goods or Service?
Section 3 read with Schedule II stipulates that 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 shall be treated as supply of service.
Major Revenue Items
Hotel Industry generates revenue from the following steams:
- Food & Beverages;
- Outdoor Catering;
- Other Incomes.
Food & Beverages:
The Food and Beverage (F&B) sector is going to have a neutral to marginally positive impact due to GST depending on the restaurant’s turnover and services they offer. Owing to the high abatement rate of 60% in the sector, the overall tax comes close to 18.5-20.5% previously. Therein, a major impact will fall on A/C restaurants inside 5-star and luxury hotels, which have attracted a GST of a whopping 28%.
How it will affect the industry
Restaurant owners have more reasons to cheer in the GST regime. Under the VAT regime, restaurant business owners did not have any option to adjust the output service tax liability with the credit of input VAT on goods consumed. However, under GST both these taxes will be subsumed into GST and thus credit of input will be available for adjustment against the output liability, irrespective of goods and services.
Restaurant is one of the source of revenue for the Hotel Industry. The restaurant provides services which will be considered as supply of service under the GST law. Restaurant Service provider whose aggregate turnover in the last financial year does not exceed Rs.75 Lakh can opt for composition scheme. If service provider opts for composition scheme then tax rate applicable shall be 5% (2.5% CGST + 2.5% SGST).
GST Council has come out with the rates for the services at the restaurants and same are mentioned below:
- Supply of food/drinks in restaurant not having facility of air-conditioning or central heating at any time during the year and not having license to serve liquor the rate will be at 12%
- Supply of food/drinks in restaurant having license to serve liquor the rate will be at 18%.
- Supply of food/drinks in restaurant having facility of air-conditioning or central heating at any time during the year the rate for the same will be at 18%.
- Supply of food / drinks by a restaurant of 5 star and above category - 28%.
There will be growth in the business of Food Trucks as they won’t have any impact of GST as their turnover usually don’t earn more than the bracket limit of Rs.20 Lakh.
Under the Pre-GST regime, room revenues attract luxury taxes and service tax. Luxury tax, being a state subject, varies from state to state, and is computed using different methods and rates. While certain states computed taxes on actual tariff others use the rack rates. Post GST, these vagaries would get smoothened with all hotels across the country falling into four buckets depending on their tariffs.
Accommodation will be covered under the purview of supply of Service. The notified rates as for the accommodation which are given below:
- Services by a hotel, inn, guest house, for residential or lodging purposes, having declared tariff of a unit of accommodation below Rs.1,000 per day or equivalent then the rate will be NIL
- Accommodation in hotels, inns, guest houses or other commercial places meant for residential or lodging purposes having declared room tariff Rs.1,000 and above but less than Rs.2, 500 per room per day then the rate will be 12%.
- Accommodation in hotels, inns, guest houses or other commercial places meant for residential or lodging purposes where declared room tariff of Rs.2,500/- and above but less than Rs.7,500/- per room per day the rate will be 18%
- Accommodation in hotels including 5 star and above rated hotels, inns, guest houses or other commercial places meant for residential or lodging purposes, where declared room is Rs.7,500/- and above per day per room the rate will be 28%.
Banquets is also considered as the one of the revenue sources of Hotel Industry which is supply of service under GST Law. GST will be the single tax applicable on both supply of food and provision of service in case of banquet service. Under GST it is taxable at the rate of 18%.
Decoration and renting of equipment’s would be treated as a separate supply and hence taxable at rate as applicable to respective services. There would be decrease on taxes under GST Regime by 5% to 6% as compared to that of past. The hotel industry would benefit in the form of lower tax rate.
The above mentioned are some of the majorly defined revenue stream for Hotel Industry. There are also some of the other sources through which the hotels get there revenue and which can be termed under Other Income and on which GST would be applicable. For instances-
- Laundry charges: Hotel generally provide laundry services to their guest so providing laundry is a supply of service hence is taxable under 18% as provided in GST.
- Damage Charges: If some damages the property of the hotel so claiming the damage charges would also come under the purview of tolerating an act, and hence GST would be liable at the rate of 18%.
- Booking Cancellation charges: This is the most common phenomena observed in the hotel industry. Booking cancellation is also one of the revenue source for hotel industry and whatever the booking cancellation amount would be taxable under GST at 18% as it also amounts to tolerating an act.
- Early Check-in or Late Check-out: Sometimes guest do check in early or check out late in that case some extra amount is being charged for their over-stay so on that amount also GST would be applicable and the rate of the same would depend upon the accommodation rate.
Time of Supply:
The Time of Supply of Service provision has been incorporated under Chapter IV Section 13 of the CGST Act. Time of Supply in Hotel Industry with respect to the following:
- Sale of food/ bakery items the time of supply means earliest of the following:
- Date of removal;
- Date of Advance;
- Date of invoice;
- Receipt entry in the books of recipient
- Services of Renting halls/ lodging/ restaurant services (With or without food) then earliest of the following:
- Date of Service Provided;
- Date of Advance;
- Date of invoice;
- Receipt entry in the books of recipient
Place of Supply:
Unlike, Time of Supply of Service the IGST Act defines Place of Supply of Service under Chapter V Section 12. The Place of Supply of service in Hotel Industry would be with respect to the following:
- Sale of food/ bakery items
- State where the goods are delivered to the recipient
- Services of Renting of Banquet Hall/ Lodging
- Location of such immovable property/banquet hall/ hotel
- Restaurant Services/ outdoor catering services
- Location of performance of such services
- Other Services (Advt., Comm. Etc)
- Location of recipient, if Registered/Address on record exists.
- Location of supplier in other cases.
Service providers having centralized registration will have to get registered in each state whether providing hotel services on own account or through agent (franchise) or they have an option to take different registration or separate business verticals which needs to be examined on case to case basis.
Valuation is one of the complex procedure under GST Law. The following are some of the Valuation Rules with respect to Hotel Industry:
- There should be differentiation between deposit and advance. The amount collected from customer could be classified as a deposit. If so, then the liability arises only on application of deposit. It is suggested to bifurcate advances before receipt.
- Any discount provided before or at time of supply would be allowed, provided such discount has been duly recorded in the invoice.
- However, in case of post-sale discount, it should be established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and input tax credit has been reversed by the recipient of the supply as is attributable to the discount on the basis of document issued by the supplier.
- Post-supply discounts not allowed as deduction from the Transaction Value
- Post-supply discounts deductible if clearly agreed upon prior to time of supply and specifically linked to the invoice
- There should be clear bifurcation in the invoice as to value of liquor served by the Hotel because liquor is kept away from the purview of GST.
Input Tax Credit
The hotel industry spends a lot of money on construction and renovation. They have to move with the times in order to remain competitive and attract customers. The money paid as taxes on the construction activities cannot be used as input credit to set off the taxes paid on the services offered by the hotels and restaurants.
- The Section 16 of CGST Act specifically mentions about Input Tax Credit. It provides that ITC on supply of goods and services is available subject to the following conditions:
- Possession of tax invoice/debit note
- Receipt of goods/services
- Payment of tax charged on such supply to appropriate government
- Furnishing of GST return by supplier.
The time limit is 180 days and if the recipient fails to pay to the supplier of goods or services then the amount claimed by the recipient with interest shall be added to recipient’s output liability.
In GST the ITC can be set off as under:
- IGST credit: IGST, CGST & SGST/UTGST in such order
- CGST credit: CGST & IGST in such order
- SGST / UTGST credit: SGST & IGST in such order
If the goods or services are used partly for business and partly for other purposes then in that case the credit shall be restricted to the business purpose only.
If the goods or services are used partly for taxable supplies and partly for exempt supplies then in that case the credit shall be restricted to such taxable supplies only.
Invoicing under GST
Under GST all invoice raised should contain a HSN Code or SAC code for the respective goods or services supplied. In case of Business to Business supplies, the GST No of the customer should be asked for, so as to enable the customer to avail credit. Further in case of business to customer supply, in GST return, invoice wise details will not be required to be furnished, a summary of the transactions can be provided.
E- Commerce operator and GST
Tax Collection at Source (TCS) provisions have been introduced on ecommerce operators in the GST Law. The term e-commerce operator is defined under Section 2(45) of the CGST Act which means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.
As per section 52(1) of the CGST act, every electronic commerce operator not being an agent shall collect tax at source of an amount calculated at such rate not exceeding 1%. The supplier who supplied the goods/services or both through the operator shall claim credit, in his electronic cash ledger, of the amount collected and reflected in the statement of the operator.
It should be noted that as per the notification issued by the government on 26th June 2017, the provisions of TCS has been put on hold and it will come into force from a date which will be communicated later.
The GST law has incorporated transitional provisions under Section 140 of CGST Act. Under GST regime, one can take input tax credit of the earlier stock. The effect of transitional rules can be seen in Hotel Industry. For eg- In case, of renting of rooms or banquet halls where advance has been received against bookings & service will be provided on or after 1st July, 2017 then the service tax on such advances shall be paid to the extent of amount of advance. Service provider needs to raise invoice against such advance.
Companies specializing in food and beverages operations could be the biggest beneficiaries of GST within the hospitality sector. Food and beverages bills have multiple components and can inflate the bills by 30-35%. A single-slab tax will benefit consumers and should lead to savings of 10-15% on the overall bill. The restaurant industry has been burdened with high and multiple taxations. Hopefully, GST is going to be pinnacle which aims at evolving an efficient and harmonized consumption or destination based tax system and will remove the problems faced by the sector leading to cost optimization and free flow of transactions.