Impact of GST on Restaurant and Hospitality Sector

Goods and Services Tax (hereinafter referred to as “GST”), subject to its non-discriminatory nature, was introduced in India in 2017 as a comprehensive indirect tax. However, even before the introduction of GST, the restaurant and the hospitality sector were deemed as a booming industry in India. Thus, the article aims to analyse the current state of the industry pursuant to the introduction of GST. Further, the analysis would be subject to the impact that the GST has had on the said industry. To reduce discrepancy in the analysis, the article consists of two parallels, namely, pre-GST regime and post-GST regime.

In the pre-GST regime, all industries including the restaurant and the hospitality sector had liability to pay different kind of multiple taxes. For example, Value Added Tax (hereinafter referred to as “VAT”), Service Tax, Luxury Tax, etc. Thus, in cases where the restaurant’s menu or the hotels pricing were presented to the customers excluding these taxes, the customers became subject to paying an amount that was much higher than what they initially agreed upon. In some cases, the added total of these multiple taxes was half or even more than the initial amount of the goods itself. Thus, multiplicity of taxes had a cascading end effect. Further, such multiplicity also led to various tax-on-tax scenarios. For example, we know that the Service Tax was subjected only to the initial amount of the good or service. However, in some restaurants, the Service Tax was charged upon the sum total of the initial amount of the good and the VAT applied on it. Thus, subjecting the customer to pay more than what was actually required. However, with the implementation of GST, all these situations became riderless as no multiplicity of taxes was possible. The purpose of implementing GST was to have one common tax for all. This subjected the customers to better understanding as only one tax had to be compounded. For example, there would be only one tax in the form of GST applicable on the food and beverages bill. Furthermore, the same compounding argument could be used as a premise for indicating reduction in time to prepare bills or readying the paperwork.

However, in the post-GST regime, the argument of service charge has come to be construed. In many cases, such as in restaurants and hotels, service charge is subjected to the customer in addition to the GST. In extreme cases, some restaurants mandate these service charge as their compulsory policy. This is regardless of whether the customer is satisfied with the service availed or not. To avoid such ambiguity, the Department of Consumer Affairs issued guidelines in 2017 that were subjected to the GST.[1] Though these guidelines declared the service charge to be discretionary in nature, it subjected its application to certain exceptions. Subject to the principal rule set in the case Sun-N-Sand Hotel Private Ltd. vs The State of Maharashtra, service charges were mandated to the customers only if the approval was pre-decided at the entry point of the restaurant or hotels.[2] However, it is necessary to note that under no circumstances could the service charge be taxed.

Nevertheless, of the service charge dilemma, the end consumer or customer is still the beneficiary party as the final cost reduced evidently in the post-GST regime. The premise for such declaration was subject to the demise of multiple taxes in the Indian tax system. This resulted in an increase in foreign investment in various industries including the restaurants and the hospitality sector. Thus, implying not only expansion of the industry in question but also increased revenues for government, especially in the long run.

Further, it is necessary to observe that in the pre-GST regime, the personnel involved in the restaurants and hospitality sector operations were not eligible to claim Input Tax Credit (hereinafter referred to as “ITC”) on any of the taxes they were paying subject to the industry. The major premise for this ineligibility was the disallowance by the government to set off the Central Taxes with the State Taxes. This meant that Central Taxes like Service Tax could not be set off against State Taxes like VAT.[3] However, post the implementation of the GST, such ineligibility was no longer rationalizable. Subject to the GST, the hoteliers and restauranters could both claim ITC on the taxes paid by them. Further, such credit could be claimed in full. In addition to this, the GST also introduced a composition scheme in its framework. The scheme was specifically developed for smaller taxpayers. It subjected a fixed rate of GST[4] depending upon the taxpayer’s turnover. Thus, the taxpayer having a turnover of less than 1.5 Crores was deemed eligible for the said scheme. If the taxpayer was to opt for the scheme, the GST procedures would also be reduced. However, the drawback of this scheme was that the taxpayer who opted for such scheme would not be eligible to claim ITC. Thus, if the hoteliers and the restaurants were to opt for the composition scheme, they would automatically become ineligible from claiming ITC. Thus, the general existing scenario is that hoteliers and restauranters having turnover limited to the said categorization opt for the composition scheme, and the rest opt for ITC.

Now if we were to dive deeper into the non-monetary impact of GST on the restaurants and hospitality sector of India, the administration side benefits are also huge. Firstly, the time and effort utilized for the procedural steps reduced by a significant margin. Moreover, subject to the management of the administrative records in the post-GST regime, there was better transparency. Thus, making the administrative process much more efficient than what it was in the pre-GST regime.

Apart from these, the primary difference between the pre-GST regime and the post-GST regime is subject to the execution of the work contracts. Work contract is transfer of goods of any service that is subjected to an immovable property. Now, as established above, multiplicity of taxes was the highlight of the pre-GST regime. This subjected the service involved in executing the work contracts to both State and Central Taxes. However, post-GST, the execution of the work contract is limited to only GST. No multiplicity is involved. As a result, the administrative functioning of both restaurants and hospitality sector became comparatively easier and efficient subject to execution of work contracts being limited to the uniform tax system across India.

It is also interesting to observe the segregation of hotel rooms subject to the tariff rates applicable pre and post GST. Pre GST, there was Service Tax, Luxury Tax, VAT, etc. applicable at different rates on different room tariffs. However, even post GST, segregation of rooms was subject to the tariff rates applicable. Thus, implying that the GST was also subject to the tariff rates. Therefore, the only difference being the sub-set categorization from pre-GST to post-GST.

Another significant change that we can observe in the pre and post GST regime is the advertisement and promotional strategies used by hotels and restaurants to market and sell their products. Introduction of GST has subjected the industry personnel to make a shift in their internal operational practices from offers such as “buy one and get one free”, thereof making way for other new offers such as specific product giveaways and collective discounts on the totality of the cheque being charged to the customer.[5] This has also had a resulted in a withdrawl step taken by some small-scale hoteliers and restaurants from the on-line delivery startups.[6]

Apart from these, introduction of GST to the hospitality and restaurant sector in India is subject to certain other challenges. On an international level, the GST tax rate in India is higher compared to other Asia specific countries like Japan and Singapore. It could be said as one of the detrimental factors with regards to tourism. More tourism guarantees better customer base and higher revenue to both restaurants and hospitality sector.

The other challenge is the advancement of technology and the continuous updates and improvements provided to GST filing reforms since its inception. This is subject to GST being a newly established form of taxation. Based on the citizens response and the technicalities and other practical difficulties faced by people during GST filings after its actual implementation began, it requires to be updated and improved time and again in the form of notifications to make the tax regime better suitable for the Indian citizens and the Indian economy as a whole. This however leads to a lot of confusion among the Indian citizens and regular and timely updating can turn out to be annoying for a lot of people.

Regardless of the criticisms, GST has received immense success and positive response from the public at large. This is reflected by the GST collection for the month of March 2021 which were collected by the government of India in April 2021. This GST collection for the month of March 2021 has recorded the highest ever GST collection of around Rs. 1,41,384 crores.[7]March also accounts for the seventh consecutive month where the GST collections have been more than Rs. 1 lakh crore.[8] All this inflow reflects the success of introduction of GST and national tax collection data management, that too at a devastating time of emergence of Corona virus pandemic which has shaken not only the Indian economy but also made a global impact with the whole world economy suffering.

References [1] Arpit Haldia, “GSTCase-102-GST on Service charges/Tips collected by Hotels/Restaurants- It’s all about when customer decides to pay Service Charges to the Hotel/Restaurants and Menu Card of Hotel/Restaurants”, GST Caselaw (2020). [2] Id. [3] Impact of GST on Hospitality Industry, cleartax (2021). https://cleartax.in/s/impact-of-gst-hospitality-industry. [4] Note: The fixed rate of GST in such cases is generally lower than the actual rate. [5] Diksha Panwar & Sidheswar Patra, “Impact of Goods and Services Tax on the Restaurants and Food Service Businesses in India”, International Journal of Applied Business and Economic Research (2017). [6] Id. [7] Official cite of Reserve Bank of India, https://rbi.org.in. [8] Id.

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About Author

Aditya Vohra

A final year law student at OP Jindal Global University.

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