Under the GST law, restaurant services are taxable either at the rate of 5 per cent (without ITC) or 18 per cent (with ITC), depending on whether the said services are provided at ‘specified premises’ or not. The expression ‘specified premises’ has been defined to include such premises where the ‘declared tariff’ of any unit of hotel accommodation is INR 7,500/- or above.
This implies that the applicable rate on restaurant services is ascertained based on the ‘declared tariff’ of the hotel. This GST rate is then applied to the transaction value to ascertain the GST liability. It is a classic case wherein GST rate on one service depends on what you declare to charge for some other service.
Plight of the restaurant service providers:
There is a long-standing dispute between the GST authorities and the restaurant service providers which revolves around the interpretation of the expression ‘declared tariff’. The inconsistent application of the concept of ‘declared tariff’ by the GST authorities has caused significant hardships for taxpayers in ascertaining their GST liabilities for restaurant services.
In simple terms, the ‘declared tariff’ can be understood to mean such rates which are displayed by hotels on tariff cards, website or at the reception for customers.
However, in numerous instances, the GST authorities have equated the ‘value of supply’ of accommodation unit with its ‘declared tariff’. This has sparked disputes in cases where the restaurant service providers have charged INR 7,500 or above for any accommodation unit, without considering the frequency of such transactions. That is, even if there is a single transaction or handful transactions in a year where the service provider has provided accommodation unit at INR 7,500/- or above, the GST authorities are contending this to be the declared tariff and consequently raising a demand of GST at the rate of 18 per cent instead of 5 per cent, which is applicable to the restaurants having declared tariff below INR 7,500/-. This has created tax uncertainty for businesses, as the prices of hotel accommodation are dynamic in nature and depends on the demand in the industry. The hike in prices of hotel accommodation may be on account of multiple factors such as festivals, big events, etc.
Further, disputes have also arisen in situations where the value charged for the accommodation unit falls below INR 7,500/-, however additional charges, i.e., charges for breakfast, cab and other ancillary charges, cause the total bill to exceed INR 7,500/-.
Moreover, it is common practice on various online booking platforms to display exorbitant price (more than actual tariff of the hotel) and then offer a handsome discount to customers in order to attract them to avail services through their platform. However, the GST authorities are considering the value displayed upfront as the ‘declared tariff’, without factoring these discounts.
In all such cases, amongst others, the GST authorities are seeking recovery of differential 13 per cent of GST from the restaurant service providers.
Genesis of the concept of ‘declared tariff’:
In the erstwhile indirect tax laws, hotel accommodation services were treated to be a luxury and therefore, these services were subject to the Luxury Tax levied by States. Under these legislations, it was mandatory for the hotels to conspicuously display their certificate of registration and applicable tariff rates at their place of business. Further, they were also required to report their tariff rates to the relevant authorities on annual basis.
Pertinently, the rate of Luxury Tax was ascertained on the basis of the tariff rates declared by the hotels. This rate was then applied to the receipts from hotel accommodation services to compute the Luxury Tax liability.
‘Declared tariff’ under the GST law:
Even after the inception of GST law, the applicable rate of GST on the hotel accommodation services as well as restaurant services has remained linked to the declared tariff of the hotels, with the rate being determined based on this declared tariff. This GST rate is then applied to the transaction value to compute the quantum of GST liability.
However, unlike the state laws on Luxury Tax, the GST law did not specify the regulatory requirements with regards to the declared tariff. As a result, it was no longer necessary for the hotels to display their certificate of registration and applicable tariff rates at their place of business.
Further, while the term ‘declared tariff’ was defined under the GST law, there was no clarity as to what would fall under the purview of ‘declared tariff’. To address the same to some extent, the CBIC came with a Circular, wherein it was clarified that tariff declared anywhere, i.e., on websites or tariff cards or displayed at the reception, will be considered as the declared tariff.
However, as discussed above, there is no requirement under GST law for the hotels to display tariffs in the first place. Further, considering demand for hotel accommodation services is often seasonal and occasion-based, and prices fluctuate accordingly, hoteliers find it difficult to set a tariff for the entire financial year.
Declared tariff – A bane for hotel industry?
Shortly after the inception of the GST law, the Government realized that the taxability of hotel accommodation services on the basis of declared tariff is causing a lot of hardships for both end customers and hoteliers.
It was observed that the prices of hotel accommodation are dynamic in nature due to frequent changes in demand in the industry. During off-seasons, the hotels provide heavy discounts on their declared tariffs to the end customers. This leads to a situation where the consideration towards the hotel accommodation continues to drop down, however, the rate of GST remains unaffected. Consequently, this makes the hotel accommodation services costlier to the end customers and affects the hotel industry.
As such, it was realized that it is impractical to levy GST on the basis of the declared tariff, as it is an outdated concept for determination of price for the hotel accommodation. Further, it was observed that the concept of ‘declared tariff’ no longer exists in the GST law and the hoteliers have to still comply with an additional requirement of declaring tariff, which is no longer possible due to dynamic pricing in the industry.
Accordingly, in the 28th GST Council Meeting, it was recommended that the term ‘declared tariff’ to be substituted with the words ‘value of supply’ in the rate entry pertaining to hotel accommodation services to address key challenges as discussed above.
Contrastingly, no such amendment was introduced in the rate entry for restaurant services, wherein the same problem persisted as the accommodation services. This resulted in the continued application of the concept of ‘declared tariff’ for the purpose of ascertaining applicable rate on restaurant services. Consequently, the problems associated with the concept of ‘declared tariff’ persisted in case of restaurant services.
Recent changes and way forward:
Considering the challenges discussed hereinabove, in the 55th GST Council Meeting, it was recommended to make suitable changes in the definition of ‘specified premises’ w.e.f. April 2025. These changes intend to link the tax rate on restaurant services to the value of supply of accommodation unit, rather than the declared tariff. In addition, it was recommended to provide an option to the service providers to pay tax on the restaurant services at the rate of 18 per cent (with ITC), irrespective of value of supply of accommodation unit, by giving a declaration at the beginning of the financial year or upon registration.
However, even after the above changes come into effect for future, disputes with respect to the declared tariff raised by the GST authorities for past periods are likely to continue.
In absence of any clarification on this issue, the taxpayers will most likely choose to pay tax at the rate of 18 per cent from 1 April 2025, as this would completely mitigate the possibility of disputes from the department on the taxability and they would be eligible to avail ITC in this option.
However, this could result in an increase in the tax incidence and consequently cost for the end customers. To counter this, it is important that the CBIC issues a clarification for the past period to resolve the ambiguity between ‘declared tariff’ and ‘value of supply’. Such a clarification would not only reduce unnecessary litigation but also expedite the resolution of pending litigation on this issue. Further, considering the financial implications, a timely resolution will go a long way in fostering growth and sustainability for the industry while also keeping a check on the cost to the end customers.
[The authors are Associate Partner and Associate, respectively, in GST advisory practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
