GST Impact on Hotel Industry, Impact of GST on Hotels, Mandap Keeper: CGST Act, UTGST Act and IGST Act have received the assent of the President on 12th April 2017 and now there is finality and clarity with regard to the provisions contained therein. The stage is set for the roll out of these Acts from the appointed day – 1st July 2017.
There is confusion and anxiety among the owners of Hotels and Restaurants with regard to the liability of tax under CGST Act and SGST Act. The CGST Act and the SGST Act have more or less identical provisions and there is no change of tax liability under these Acts. SGST Act has not become law as yet. The SGST Act will have to be passed by the State Legislature of all the 31 States of Union of India and will become law when the Governor of the State shall grant the assent to the said Act.
GST Impact on Hotel Industry, Impact of GST on Hotels, Mandap Keeper
- 1 Taxability of Hotels under Present laws with respect to the State of Madhya Pradesh
- 2 Tax liability of Hotels under Service Tax
- 3 Composition Scheme under MP VAT Act
- 4 Tax liability on Hotels under GST regime
- 5 Taxability on Mandap Keeper Services etc under GST
- 6 Classification Issues
- 7 Conclusion
Constitutional validity of Service tax on “Accommodation Services”
The Constitutional validity of service tax on provision of ShortTerm accommodation service by a hotel, guest house, etc. ,and service provide by restaurants was once again challenged before the Hon.Delhi High Court in Federation of Hotel and Restaurant Association of India v. UOI in WP (C) No.6482 of 2011, dated 12.08.2016[2016(44)S.T.R.3(Del.)]. The Hon’ble High Court of Delhi in this case upheld the constitutional validity of levy of Service Tax on restaurant services but, struck down the validity of Service Tax on Short-Term Accommodation Services.Entry 62,List –II, i.e., State List,which empowers only the State Legislatures to levy tax on Accommodation services. The said Entry reads as follows-
62 “taxes on luxuries including taxes on entertainments, amusements , betting and gambling.”
Parliament has no power to levy service Tax on Accommodation services under residuary entry in the Seventh Schedule to the Constitution. The same principle has been upheld by the Hon’ble Apex Court in Godfrey Philiphs India Limited v. State of UP –(2005) 2SCC 515.
Article 246 A introduced through the Constitution (One Hundred and First Amendment Act) empowers Parliaments and the Legislatures every States to tax accommodation services.
PROVISIONS OF ACCOMMODATION SERVICES IN THE STATES
The Centre and the States are levying tax on Services and Goods provided by restaurants respectively. This has resulted on overlapping of VAT and Service Tax on restaurants.
Further, the States have also levied tax on accommodation services under Entry 62, List –II, i.e., State List.Tax on accommodation has been discussed in this article with regards to provisions contained in Madhya Pradesh Vilasita , Manoranjan, Amod Evam Vigyapan Kar Adhiniyam , 2011 ( LEAT Act ) as a test case to illustrate the difference between the present regime and the GST regime on the impact on Hotel Industry on pan-India basis
Similar provisions may also exist in other states regarding the taxability of accommodation services.
Taxability of Hotels under Present laws with respect to the State of Madhya Pradesh
The taxability on luxuries (services) provided in a Hotel can be summarized as under:-
- The owners of Hotels are liable to pay tax @10% on the turnover means the receipts of monetary consideration as per Section 6 of LEAT Act.
- The threshold limit for being liable to pay tax under LEAT Act is Rs.10 lacs of turnover per annum.
- There is no payment of Luxury Tax on hoteliers where rate of charges per day is Rs. 3,000/- or less.
- The new Hotels or existing Hotels undergoing expansion are enjoying the benefit of exemption from payment of Luxury Tax for a period of 5 years or 8 years depending upon the location of the Hotel, as per Notification No.8 dated, 05.02.2011,
- Heritage Hotels have been granted the exemption from payment of Luxury Tax for period of 10 years as per the Notification No.10 dated, 05.02.2011.
- There is also the benefit from payment of Luxury Tax to Hotels registered under Bed & Breakfast Scheme of M.P. Tourism.
- No Luxury Tax is leviable on Hotels during off season of 3 months in a year in Hotels located at the places other than Municipal limit of Bhopal, Gwalior, Indore and Jabalpur.
- Similar provisions with regard to levy of tax on accommodation on Hotels exit in Other states as well.
Tax liability of Hotels under Service Tax
The Service Tax liability on Hotels and Restaurants can be summarized as under:-
- There is no Service Tax on services provided in a Hotel.
- Service Tax is leviable @15% on services provided by Air Conditioned Restaurants with the abatement of 30%.
Composition Scheme under MP VAT Act
- The dealer opting for composition u/s 11 of MP VAT Act is liable to pay composition money @3% on the turnover of cooked food manufactured without the facility of input tax rebate.
- No input tax rebate is available to composition holders u/s 11.
- The manufacturers u/s 11 have the benefit of buying goods taxable @5% from unregistered dealers without the liability of payment of purchase tax.
- Composition under VAT regime is available to the dealers whose turnover per annum is upto Rs.1 crore
- Similar provisions exit in different States in respect of composition provisions to restaurants.
- There is also provision in some States to grant licence to restaurants at nominal rates on advance payment of licence fee.
Tax liability on Hotels under GST regime
- Luxury Tax on services provided in a Hotel is leviable @10% on receipt basis. As all services under GST regime are to be taxed @18% while the present rate of Service Tax is 15%.
- The services provided under GST regime by way of lodging accommodation by a hotel, inn, guest house, home stay, club or campsite by whatever name called and including a house boat or any other vessel will be taxable @18% on the transaction value of supply of services in all probability.
- There is no Luxury Tax under LEAT, where the rate per day for accommodation is upto Rs. 3,000/-. Such exemption on daily rate basis may not be available under GST regime.
- The threshold limit under GST regime on supply of services is aggregate turnover of Rs.20 lacs per annum. On discount, some of the owners who are paying tax under LEAT may not be liable to pay tax under GST regime.
- Some of the owners of the Hotel who are enjoying exemption from payment of Luxury Tax will not get the benefit of exemption under GST regime.
- The supplier of Hotel services will be entitled to input tax rebate on the inputs, capital goods and input services used by them in the course or furtherance of business.
- Alcoholic liquor for human consumption alongwith Perto Products has been retained in entry 54 of List –II, i.e., State List of the Seventh Schedule of the Constitution. As such, tax on Alcoholic liquor for human consumption, as provided to customers in restaurants will continue to attract Vat under VAT Laws of the states. Being a super luxury, it may attract a higher rate in the interest of state revenue.
- No Input Tax credit will be available to sale of alcoholic liquor for human consumption as it is outside the GST regime.
Service Tax Liability on Mandap keeper , Hotels and convention Services , providing full catering services
- Mandap keeper, Hotels and convention Services, providing full catering services shall pay service tax on 60% of the gross amount charged, under abatement scheme.
- Outdoor caterers shall, under abatement scheme, charge service tax on 50% of the amount where he provides full and substantial meal.
- Similarly, under the abatement Scheme, the Pandal and Shamyana Service providers shall be liable to pay tax on 70% of gross amount charged if full catering service is provided.
- The rate of service tax on above services is 15%.
- Simultaneously, the states are also subjecting to tax the services provided by Marriage hall,Mandap Keepers etc with a general rate of 10%. The same receipts re being subjected tax both by the Central Govt. and the State Govt., resulting in double taxation without any grant of credit for Input Tax on goods and services.
Taxability on Mandap Keeper Services etc under GST
- Mandap keeper, Hotels and convention Services,etc. , as mention above are proposed to be taxable @ 18% under GST.
- There is abatement on these services under Service Tax law which may not be available under GST as these services will not be taxable separately under any state law.
- There will not be overlapping of taxation as present state taxation laws have been subsumed in GST.
- There will be availability of Input Tax Credit of taxes paid on supply of Inputs and Input Services.
With the adoption of Five rate – taxation slab i.e. 0% ,5% ,12% 18% and 28% , there are bound to be classification issues and litigation. Such issues shall be resolved with the application of principles decided under the present regime.It takes at least 20-25 year for the taxation law to mature and to settle the classification disputes.
For example, if a customer takes cold drinks in a hotel/ restaurant, it will result in complications to whether the cold drinks to be subject to tax under 28% tax slab with a cess of 15% or @18% as Restaurant services.
Similarly where a customer orders for alcoholic drinks alongwith meals,further complications will arise as alcoholic drinks, although outside the GST regime,will be taxed alongwith restaurant services. Further, no input tax credit will be available on VAT paid on purchase of alcoholic drinks.
It is evident that the hoteliers will pay Service Tax under GST regime @18%, while they are paying tax @10% on average under State Acts. They will not get any benefit of exemption as notified under State Act. Every State has exempted accommodation services for specified periods to promote tourism in their State.They will also not get any benefit where the daily tariff charges has been fixed beyond which the luxuries provided in a hotel are taxable. Such limit is Rs.3,000/- in the State of M.P.
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