Introduction

 

The Indian tourism and hospitality industry has emerged as one of the key industries & a driving factor for the growth & significant improvement of the services sector in India. While, Hotel, Restaurant & Catering Industry being a very important part of the Hospitality Sector is looking forward to the rationalization of indirect taxes to promote India as a popular & globally recognized tourist destination, Union Budget 2013-14 has come as a rude shock for the Hospitality industry in India, giving no relief on the taxes or any incentive whatsoever. Further it has burdened the Hotel & Restaurant sector by including A.C Restaurants within the ambit of Service Tax Regime irrespective of the fact whether they are providing liquor to customers, to make matters worse. Earlier only AC restaurants serving liquor fell under the service tax purview, now there is no such exemption.

 

Pre & post Budget 2013-14 service tax implications for Hotel & Restaurant sector

 

With effect from July 1, 2012, Service is defined under Section 65B(44) of Chapter V of the Finance Act, 1994 (“the Finance Act”) means any activity carried out by a person for another person for a consideration is service, which includes a declared service. Further service tax is applicable unless said service falls under the negative list of services or otherwise exempted specifically.

 

In terms of Clause (i) of Section 66E, service portion in an activity wherein goods, being food or other articles of human consumption or any drink is supplied in any manner as a part of the activity is a declared service. Thus it implies that service provided by restaurant or caterer is a declared service chargeable to service tax.

 

Further, prior to Union Budget 2013-2014, the Government vide S. No. 19 of Mega Notification No. 25/2012-ST dated June 20, 2012(“Notification 25/2012”) granted exemption from payment of service tax to restaurants, eating joint or a mess providing service in relation to food or beverages, other than those having:

 

• facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and
• a license to serve alcoholic beverages.

Thus from the above interpretation all AC restaurants having license to serve liquor were only subject to service tax & this position of law prevailed prior to the introduction of Budget 2013-2014.

 

However post introduction of Union Budget 2013-14, the Central Government vide Notification No. 03/2013-ST dated March 1, 2013 (“Notification 03/2013”) which came into effect from April 1, 2013 has amended S. No. 19 of Notification 25/2012, and deleted point (ii) thereof.

 

In simple terms, it means all AC restaurants whether or not they have license to provide liquor facility to their respective consumers, they will be liable to mandatory service tax chargeability while on the other hand exemption from service tax to restaurants, eating joints, mess etc. will be available only when such restaurant doesn’t have the facility of air conditioning or central air heating in any part of the establishment, at any time during the year.

 

As a consequence, now all air-conditioned restaurants, eating joints like Pizza huts, McDonalds, KFC, etc., will come under the service tax regime irrespective of fact whether they serve alcoholic beverages or not. Thus customers would end up paying more even at eating joints with self-service, as while levying service tax, no distinction is made between premium restaurants and normal eating joints with self- service.

 

Thus this enhanced scope of service tax will directly impact the common man as the incidence of service tax will be shifted by this sector to the consumers which may negatively impact the revenue of this sector with the subsequent reduction in the percentage of consumers due to the increased cost of food & beverages in form of tax.

 

Significant Issues:

 

• AC facility for part of the year: The service tax will be levied even where the air-conditioning facility has operated for a part of the year or in any part of establishment. Thus even when AC facility is not available for any part of the year yet it would be an unnecessary cost burden to the customers & will further hinder consumers from entering restaurants & negatively impact Hotel & Restaurant sector revenue as a whole.
• Self-service or Pick up or home delivery: Whether Self-service or Pick up or Home delivery, etc. will come under the purview of service tax or not, being a very important issue which has not been properly highlighted by the Budget 2013-14 need proper clarity due to impending vagueness involved. Service tax is chargeable when service provided in relation to serving of food or beverages by restaurants, eating joints or mess having facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year. Hence, it is debatable whether home delivery or supply of food/drinks amounts to serving of food/drinks or not. As per our analysis we can say that service tax can be levied only if there's a component of service involved which would typically be the case when one goes to a high-end restaurant. In case where food is just bought as 'takeaways' or in case of home deliveries, there's no service is involved. Even as it has become expensive to eat out in an air conditioned restaurant from April 1 onwards after 12 per cent service tax became applicable on such joints as per the budget proposal, associations of restaurants and hotels have approached the Finance Ministry urging it not to bring the popular take-away transaction and order from home service under the service tax ambit & to provide necessary clarity in this matter.
• Double Taxation of VAT and Service Tax: Taxes and charges on seemingly simple stuffs like food and drinks are one such thing where customers are taken for granted. A common man fails to understand the inclusion of service charge, Vat & service tax charged in the restaurant’s bill/invoice. The existing problem of double taxation of VAT and Service tax will continue to persist. Budget 2013-2014 has given no relief in this aspect rather burdened it more with the widening impact & scope of service tax to all AC restaurants.

Clarifications of Certain doubts Vide Circular No 17/3/2008-ST dated 7 October 2013

 

According to the Circular No 17/3/2008-ST dated 7 October 2013 it has provided clarifications in respect of certain doubts such as,

 

• In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant? In a complex, if there is more than one restaurant, which are clearly demarcated and separately named, but food is sourced from a common kitchen, only the service provided in the specified restaurant having the facility of air conditioning or central air heating is liable to service tax and service provided in a non air-conditioned or non-centrally air-heated restaurant will not be liable to service tax.”
• Secondly in a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise? Service tax will be levied even if services are provided by a hotel in areas that are not air-conditioned or centrally-heated, such as swimming pool or an open area attached to the restaurant.
• Thirdly, “If goods are sold on MRP basis (fixed under the Legal Metrology Act) across the counter as a part of bill or invoice, these have to be excluded from the total amount for the determination of value of the service portion. This means, if the MRP on a packaged water bottle is Rs 100 and the service charge is Rs 20, then the service tax cannot be calculated on Rs 120, but only on Rs 20.

Although Budget 2013-14 has failed to give any incentive to Hotel & Restaurant sector as such but Service tax has been waived for hotels, lodges in Uttarakhand

 

Although extension of service tax has brought a huge disappointment to hotel & restaurant sector, yet the central government has given some tax relief to in respect of hotels & lodges located in Uttarkand. Recently ad-hoc exemption has been given through service tax notification exemption order no 01/2013-ST to hotels, restaurant located in Uttaranchal. As per the order, due to devastating effect & damage caused to the state due to the recent floods, service tax exemption has been provided to the following services:
* Services by way of renting of a room in a hotel, inn, guest house, club or other commercial place meant for residential or lodging purposes; and
* Services provided in relation to serving of food or beverages by a restaurant.

 

The aforesaid exemption has been provided for a limited period from 17 September 2013 to 31 March 2014. Thus, for the aforesaid period, hotels and restaurants in Uttarakhand would not be required to pay any Service tax as temporary relief.

 

Conclusion

 

To encourage growth & revenue in Hotel & Restaurant sector, government should give special attention, devise new tax plans & make necessary amendments to minimize the service tax impact which is not only adversely effecting the sector as a whole but also the common man especially the middle class who consider restaurants and common food joints a huge part of their recreational means.

 

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