GST on Restaurant.

Issue: If we ask a general question, “Whether the GST rates are compulsory?” the categorical answer would be “Yes”. A supplier does not have any option as regards the rate at which he can discharge his tax liability on his supplies. Supplier must pay GST only at the rate applicable to his supplies. He has absolutely NO OPTION at all.

First reason for this conclusion is that GST is an indirect tax and therefore GST is allowed to be collected by a supplier (except composition suppliers) from customers. Thus, obviously the tax burden is shifted to ultimate consumer and tax is not paid by a supplier from his own pocket. Secondly, even if a supplier pays GST from his own pocket at a rate higher than the rate applicable to him, such excess payment would be required to be refunded back to him u/s 54(8)(e) of the CGST Act. Lastly, Article 265 of the Indian Constitution provides that “No tax shall be levied or collected except by authority of law.”

A controversy has arisen especially about restaurants, who are liable to pay GST @ 5% without ITC but they wish to pay GST at a higher rate of 18 % and avail ITC.

The issue for discussion is as to whether a restaurant can opt to pay GST @ 18% and avail benefit of ITC. M/s Hardcastle Restaurants has filed a Special Civil Application before the Hon. Gujarat High Court - 2019-VIL-564-GUJ, however decision is awaited.

2.    Position upto 14th Nov. 2017: GST rate on supply of food and drinks by restaurants was 12% or 18% upto 14th Nov. 2017, depending on whether the restaurant had air- conditioning/central air-heating or permit to serve liquor. ITC was, of course, available to such restaurants. All restaurants, opting for composition, are liable to pay GST @ 5% but are not eligible for ITC.

3.    Position form 15th Nov. 2017 onwards: From 15th Nov. 2017, by virtue of the CTR Notfn. No. 46 dated 14th Nov. 2017, the scheme of taxation of restaurants is as follows:

a.     GST @ 5% without the benefit of ITC [sr. 7(i)]: Supply of food and drinks by restaurants, from the premises, other than those located in the premises of hotels etc. having declared tariff of any unit of accommodation of Rs. 7,500 and above per day. This GST rate of 5% is subject to the condition that ITC, on goods and services used in supplying the services, should not have been taken.

b.    GST @ 18% with the benefit of ITC: GST rate of 18%, with the benefit of ITC is applicable to following supplies of food and drinks:

i.         Supply of food and drinks by restaurants, from premises, located in the premises of hotels etc. having declared tariff of any unit of accommodation of Rs. 7,500 and above, per day. [sr. 7(iii)].

ii.         Supply of food and drinks for (outdoor catering) at exhibition halls, events etc. [sr. 7(v), see amendment by CTR Notfn. No. 13 of 2018]

iii.         Supply of food and drinks in hotel, club etc. premises etc. for a function with renting pf premises. [sr. 7(vii)]

iv.         Supply of food and drinks, other than the supplies, mentioned above-i.e. other than the supplies of food and drinks covered at sr. 7(ii), 7(iii), 7(v) and 7(vii)-[sr. 7(ix)]. The Explanation to sr. 7(ix) clarifies certain aspects in this regard and is crucial for the topic under discussion, reads thus:

“Explanation.- For the removal of doubt, it is hereby clarified 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 drink, where such supply or service is for cash, deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having declared tariff of any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent shall attract central tax @ 2.5% without any input tax credit under item

(i)    above and shall not be levied at the rate as specified under this entry.”

c.     On this background, we discuss the issue as to whether such restaurants supplying food and drinks from premises, other than those located in hotels having per unit per day declared tariff of Rs. 7,500 and above, can opt to pay GST @ 18% and take ITC or whether such restaurants must pay GST @ 5% without claiming ITC.

4.    General scheme of tax rates in GST:

a.     Powers to notify rates: Sec. 9(1) of the GST Act provides for levy of tax at rates, to be notified by the Government. Sec. 11(1) of the GST Act empowers the Government, on the recommendations of the Council, to exempt generally, by notification, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description, from the whole or any part of the tax leviable.

b.    Condition in notification: CTR Notfn. No. 11 of 2017, which provides for tax rates for supply of food and drinks by restaurants etc. has been issued by the Government by using powers u/s 9(1) and u/s 11(1) of the CGST Act. Sr. 7(i) of CTR Notfn. 11 of 2017, which provides for tax rate of 5% contains a condition as follows:

“Provided that credit of input tax charged on goods and services used in supplying the service has not been taken.”

c.     Consequences of not complying with a condition in Rate Notification:

a.     Grammatically speaking and generally, too “then” comes after “if”. In other words, when a law mandates something to be done or something not to be done, it also contains consequential provisions in case of deviant behavior.

b.    Now, as regards non-compliance of a condition in GST Rate Notifications, the consequence would be levy of GST at a rate higher than the rate applicable to a supplier, who complies with the condition. Simply speaking, if a supply is liable to GST @ 5%, if some condition, attached to it in the Rate Notfn. is complied with and if such condition is not complied with, then the supply would be liable to GST at a higher rate of say 12%, 18% etc.

c.     To levy GST at a higher rate and especially to decide the appropriate rate, there would be two options available.

i.     First option- for goods & services both: First option would be to ascertain as to whether there is any other specific entry in the Rate Notification, under which such supply can be classified.

For instance, cars [HSN 8703] for physically handicapped are liable to GST @ 18%, if an officer of the rank of Dy. Secy. and above certifies that the said car is capable of being used by a physically handicapped person and also if the buyer gives an affidavit that he shall not dispose of the car for a period of 5 years. [sr. 400 in Sch. III of

CTR Notf 1 of 2017]. If a supplier does not comply with these conditions, then his supply would be liable to GST @ 28% being classified at sr.165 in Sch IV CTR Notf 1 of 2017because entry at sr. 165 covers cars of HSN 8703.

ii.     Second option:

1.    second option for goods: If the first option is not available i.e. if a supply cannot be classified under any other entry then it would be liable to GST @ 18% and would get classified under the residuary entry i.e. 453 in Sch. III of CTR Notfn. 1 i.e. “Goods which are not specified in Schedule I, II, IV, V or VI”. It may be noted that this entry 453 is applicable irrespective of the Chapter in which the goods fall.

2.    Second option for services: If the first option is not available, then such service would liable to GST @ 18% and would be classified under the residuary entry 35 of CTR Notfn. 11, which reads thus:

35. “Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified).”

5.    Consequences due to insertion of Explanation to sr. 7(ix) in Notfn. 11 of 2017:

i.         This Explanation explains, in categorical terms, that supply of food and drinks, which is covered by sr. 7(i) and taxable at 5% shall not be liable to tax @ 18% under sr. 7(ix). The objective of this Explanation is to rule out the possibility of any restaurant classifying it’s supply under sr. 7(ix) thereby making it liable to tax @ 18% and availing the benefit of ITC. So we can say that a restaurant would be

fastened with the rate of 5% without the benefit of ITC and hence would not be eligible to pay GST @ 18% by classifying it’s supply under entry 7(ix).

ii.         Now, we need to ascertain as to whether such a supply can be allowed to be classified under entry 35 of CTR Notfn. No. 11 of 2017 and be taxed @ 18% with ITC benefit. Entry 35 contains two clauses separated by a semi-colon. For this discussion, we would be concerned only with the second clause i.e. “and other miscellaneous services including services nowhere else classified”. If we dissect this second clause, it seems that it has two sub-clauses i.e. “other miscellaneous services” and the second sub-clause, “including services nowhere else classified”. Interestingly, the residuary entry 435 for goods covers goods, classified under any Chapter but the residuary entry for services i.e. 35 mentions a specific Heading 9997. Supply of food & drinks by restaurants etc. under entry 7 is classified under Heading 9963 (Accommodation, food and beverage services).

iii.         Food and beverage services [heading 9963] are not classified under any other entry with a higher rate of tax and secondly due to the express mention of Heading 9997 in the residuary entry 35, it would not get classified in this residuary entry i.e. 18% GST with ITC. Therefore, such supply could be stuck with the GST rate of 5% without ITC.

5.    Whether IRCTC and its licensees can classify it’s supplies under sr. 7(ix) instead of sr. 7(ia) and pay GST @ 18% with benefit of ITC?

Supply of food and drinks by IRCTC or their licensees in trains or at platforms is liable to GST @ 5% by virtue of entry at sr. 7(ia) [inserted wef 27th July 2018 by CTR Notfn. No. 13 of 2018]. This rate of 5% is subject to the condition that ITC on goods and services used in supplying the services should not have been taken.

Entry at sr. 7(ix) reads thus: “Accommodation, food and beverage services other than (ii), (iii), (v), (vi), (vii) and (viii) above.” Thus, indirectly, this entry is made applicable to supplies covered by sr. 7(i) and 7(ia) only as entry at sr. 7(iv) being deleted. Supplies of food and drinks by IRCTC and its licensees are liable to GST @ 5% without benefit of ITC. Now, this entry 7(ix) by impliedly covering supplies at sr. 7(1a) would become applicable to entry 7(1a) too & hence GST rate of 18% with ITC would be applicable.

The Explanation to this entry at sr. 7(ix), categorically states that the supplies of food and drinks (as described in entry at sr. 7(i)) would be liable to GST @ 5% under item (i) above and shall not be leviable to GST @ 18%. However, this Explanation does not make mention of item (ia), which relates to IRCTC.

In view of the above, it is felt that IRCTC and its licensees could, perhaps be eligible to classify it’s supplies under sr. 7(ix) instead of sr. 7(ia) and pay GST @ 18% and take the benefit of ITC.

It is not really clear as to whether this was intended for as there does not appear to be any logic for allowing ITC to IRCTC, when other restaurants are not eligible. Perhaps, some clarification needs to be issued.

6.    Whether suppliers of other services, liable to GST @ 5%, without the benefit of ITC, can opt for a higher GST rate and take benefit of ITC?

There are certain other services, which are also liable to GST @ 5% without the benefit of ITC.

For example, “Transport of passengers, with or without accompanied belongings, by rail in first class or air-conditioned coach.” [sr. no 8(i) of CTR 11 of 2017, Heading 9964]. Tax rate for this service is 5% with the condition that ITC should not have been utilized for paying GST. However, passenger transport services, other than the service covered by 8(i) is made liable to GST @ 18% [sr. no 8(vii) of CTR 11 of 2017, Heading 9964] with the benefit of ITC.

As can be seen, the Heading 9964 is common for the entries at sr. 8(i) as well as 8(vii). Thus, there would be an option for a supplier of transportation services to opt for GST @ 18% and take benefit of ITC. Secondly, this entry 8(vii) also does not contain an Explanation similar to the one provided in entry at sr. 7(ix) for restaurant supplies.

Thus, all other services could be eligible for an option of paying at a higher rate and claiming benefit of ITC, which contains a scheme similar to this entry at sr. 8.