GST Challenges in Hospitality Sector Webinar

Thank Good evening everyone. We sincerely appreciate your presence today. Welcome to our webinar on GST challenges in the hospitality sector, roadblocks and remedies. My name is Shiva Bharti and I am representing team TaxMath. Our core services encompass publishing, maintaining legal research platforms and delivering compliance solutions and training to professionals and students. We are delighted to host this live session as part of our commitment. providing corporate and legal professionals with accurate and authentic information. I am honored to introduce our distinguished speaker for today's session, CA Rahul Pansari. He is a seasoned chartered accountant and cost and management accountant, hosting over a decade of specialized experience in indirect taxes. He has achieved distinguished All India ranks in both the CA and CMA exams. He is adept at providing strategic tax advice across multiple sectors, such as real estate, e-commerce, hospitality, manufacturing, IT and ITES. His diverse background includes key managerial roles in industrial and consulting arenas. Currently, he heads the indirect tax division at Eka Advisors India LLP, where he continues to enrich the GST community by demystifying complex legal nuances and sharing valuable insights. Before we commence, please note the following instructions to ensure a seamless experience. Your microphones will be muted throughout the session. You are encouraged to post your question in the chat box. Queries will be addressed during or after the presentation. A copy of today's presentation will be emailed to you for your future reference. Without further ado, let us welcome our esteemed guest to the virtual stage. Over to you, sir. Thank you. SHIVA SINGHALANI-Thanks, Shiva. And a very warm evening to everyone who have joined the webinar. And welcome to you for the webinar on Navigating GST Challenges. in the hospitality sector, roadblocks and remedies. So when we talk about this term hospitality, it encompasses a vast segment of service industry which covers multiple sectors. The top one includes accommodation, food and beverages, travel and tourism and entertainment. At its heart, the Indian hospitality sector is deeply rooted in the philosophy of Atithi Devobhava which translates to treating guests with utmost respect. as one would treat the god. On a macro level, this sector has been a key driver in the Indian economy contributing significantly through employment generation, forex earnings and infra development. The contribution of this sector in the economy, you can very well see the numbers on the screen which are the real contributor and the numbers have been quite evident in showing that. What sets the industry apart from any other sector is its discretionary pricing to the customers and also the intense focus on customer experience to make as delightful as possible. Now moving on to the GST on this sector, this sector has been faced numerous amendments, clarification, advanced rulings over the past seven years of GST implementation. While GST has been overall beneficial in this sector in terms of reducing cost to customers. and harmonizing the tax rates from a hotel perspective. It has also brought some of the challenges like the breakage of seamless flow of credit, especially because in the hotel due to multi-state operations. And also there are some issues which still remain unresolved today. Without much time, we'll move on to the agenda of the webinar today. We are going to dwell deeper into three major sectors of the industry, which are hotel, food and beverages and number three school living sector. What we are going to see in the webinar is how the legislative framework has evolved over the time for these three sectors and what are the practical challenges. be it basic, be it advanced or a complex problem, they have evolved over the time and which these sectors are still grappling with right now. In fact, two of the issues what we are covering today have already been under litigation and right now pending at different forums before authorities. That is why it is the appropriate time to reevaluate and revisit the positions being taken on these controversial issues to ensure that the positions are fully defendable in case these are questioned by the tax authorities. So let's now deep dive into individual sectors starting with the hotel sector. Over to you Sistah. Yeah, so as we know the hotel sector has a dynamic ecosystem where generating revenue involves much more than just room bookings. So traditionally room rental has been the primary source of income for hotels. However, with time, the revenue streams have evolved. The revenue streams for a hotel can be broadly classified into three broad categories. First being the accommodation services, which includes room tariffs, additional bed charges, early check-in charges, late checkout charges, etc. Then comes food and beverage services. So, food and beverage services is one of the major revenue drivers in a hotel. Restaurants, bars, in-room dining services, banquet catering are the major constituents of this segment. Then there are certain ancillary services which are provided by a hotel to its guests to increase the overall experience of their stay. So these include spa treatments, wellness treatments, laundry services, airport pick and drop facilities, guided tours etc etc. Now that we have seen What are the various streams of revenue for a hotel? And before diving deep into the roadblocks that are faced by a hotel, let us discuss the journey of the accommodation sector under indirect taxation. So before the advent of GST, the hospitality industry grappled with a complex tax system, burdened with multiple levies from both state and center. Center used to levy service tax and state used to levy luxury tax. Then came July 2017 and with it came goods and service tax or how we call GST. So this introduction of GST was a game changer for India's taxation system and the accommodation sector felt the significant impact on it. So under GST, we saw the introduction of a tired rate system for hotels. The tax rates were initially based on declared room tariffs. However, this led to a lot of industry-wide representations, discussions and protests before the GST Council. In fact, we have also helped some of our clients in lobbying before the GST Council for this issue. So after nearly a year of persistent efforts and protests, an amendment was made. Not an amendment, a very important amendment, I would say. So now, instead of declared tariffs, the gst rates are determined on the basis of actual transactional value so this change has brought in more clarity and fairness to the system thereafter in october 2019 there was yet another significant update the gst rates were further rationalized merging the existing tax slab existing slabs into three and eliminating the 20 subsequently in july 2022 the exemption from gst for the below thousand limit was removed simplifying the tax structure to just two slabs so at present there's a 12 percent gst for rooms with an actual value of up to 7500 and an 18 percent gst for those above 7500 so as you can see from the on the screen the actual room charge across all the time frames is 7000 however the total bill amount differs significantly. So from 8330 in the pre-GST era to 8960 during the first year of implementation of GST to 7840 currently. So there have been quite a lot of changes. Further, during the first year of implementation of GST as we discussed, the GST rate was dependent upon declared tariff and declared tariff tends to tended to fluctuate on the basis of seasons, demands and various other reasons. So, which has also led to a lot of questions being raised by the GST authorities on the aptness of the GST rates that are being charged. So now that we have discussed this, I would request Rahul to take us through the practical challenges and the issues that are being faced by the hotel sector. Sure. So as we saw, there are multiple offerings this hotel offers to the customers. Due to this multiplicity of offerings, one of the biggest challenges hotel industry faces is how to determine the classification and the applicable rate of GST on. these offerings. So let's take an example. Let's say there's a hotel who is having three categories of rooms. We can see on the screen, first one being standard, then deluxe, then the premium package. The deluxe room or the rather first one, the standard room, how it is offered is it's only the room. Everything else is given as an add-on, which is at the choice of the guest, he can either pick or not pick. Even if he picks that particular thing, it will be at the individual prices as well as individual tax rates. However, in the composite packages, there will be no choice given to the customer. If he takes the premium package, he cannot pick and choose the individual offerings. Rather, he has to take the entire package as a whole. Now, what happens, for example, in the first package, if someone takes standard package, we can take example, let's say 7,000 is for the room and 700 is charged for the meal. Practically how the hotels have been tackling this because these are offered as an add-on to the customer, the room will be chargeable at the rate of accommodation service. Since it is below the limit of 7500, it will be at 12%. Then breakfast, since it's a meal provided separately as an add-on, it will be chargeable at the respective rate, which is 5%. So effectively 7000 is at 12%, 700 is at 5%, which practically what we are seeing, authorities have been disputing this. tax levy and they have been creating this as a composite in nature with the simple reason that generally breakfast is clubbed with the room and you cannot artificially separate it to take a benefit of a lower rate on meal and other nor take the total value in the tariff computation also. So and what happens for deluxe package since room and breakfast are given together here there is no doubt that it should be treated as a composite supply. the entire package value should increase the tariff amount and accordingly the tax rate should be determined and what happens for the luxury room package because there are multiple offerings and this only becomes important when let's say the package value is less than 7500 rupees for a unit value because some of the ingredients in the package are if supplied individually are chargeable at 18 percent can one still take a benefit of composite supply and charge the entire package at 12% with a simple reason that there is no choice available to the customer to pick and choose. This is the standard package offer to the customer without any curating available to the customer. And what also happens if let's say someone upgrades from one package to another package, another layer of complexity. So the answer to these questions what I have posed lies in the fundamental concept of composite, mixed and individual supplies under GST. Even CBSE has clarified that there is no straight jacket formula which can be applied to determine whether it's a composite, whether it's a mixed supply or whether it's a standalone supply. It depends upon multiple parameters, multiple factors as to how the customer perceives the supply, how the other industry players in the segment offer this particular offering and how the predominant element of the supply is been. Also the recent circulars predominant in the context of warranty and other area, they have also given importance to the other factor which is the timing of the supply. Whether this particular add-on supply or the entry supply has been offered at the same time when the main supply has been offered, then the principle emerging from the circulars are that it should be treated as composite in nature. Otherwise if it is added on separately at the end of the event. then it should be treated as standalone supply, available at the individual rate. Accordingly, one needs to be very careful while determining what should be the appropriate classification, depending upon the fact of each case, and also maintain adequate documentation. Because what happens, these are getting investigated or audited after a few years down the line. That time to substantiate that this was how it was offered to customer as an add-on or as a package becomes slightly difficult. and hence the appropriate evaluation and the documentation is the key here moving on Another issue which is very interesting is how the pricing strategy can influence tax outcome. What happens typically in this industry is the inclusive price is offered to the customer. For example, we can see the 8500 rupees is the price which is offered to the customer, let's say on a marketplace website. Now it is sold to the customer. Now when it comes to the hotel, now what amount should be charged? The tax rate notification gives the base value. and not the inclusive value to determine the tax rate. Now, the all inclusive price charge to customer is 8500. One has to back compute and to calculate the GST amount in scenario one, let's say if I compute, computing 12%, the amount comes 911. And the base value becomes more than 7500 rupees. So as per the notification, since the base value is higher than 7500 rupees, it should be liable to 18% tax. Similarly, if I back compute the all-inclusive price charge at 18% rate, the base value arrives at which is lower than 7500. So can I opt for 12% rate? This is something which is a problem in any slab-based or tier-based tax rate mechanism. It is also similarly there in apparel and footwear industry where the pricing determines on the slab of 1000 rupees if it is below its lower rate, higher at the higher rate. So what should be the solve of this problem? Because you can see on the right side of the screen that if the base value is increased by one rupee, the taxes increased by almost 451 rupees. So what should be the solution to this? I don't think there's any technical solution to this. The only solution is the sales team should be sensitized enough that to avoid keeping the all inclusive prices between this range of 8400 to 8851. Anything between them should automatically come down to 8400 or rather increment to 8500 so that the appropriate GST rate can be computed and there is no tax leakage. This scenario is a clear-cut example as to how the tax outcome play an important role in influencing the pricing strategies. Moving on to the third issue which is very practical and very interesting which I think we all would have faced this. This is a very common phenomenon that we reach the hotel, if we reach early, we request for the early check-in. Sometimes it is given complimentary without charges. If it is with no consideration, there is no GST, there is no question about it. But there are situations where the hotel charges for this early check-in or beat a late checkout while checking out. Now the question comes that whether it is a standalone supply or is it a composite supply applicable to the same rate of what was to the room tariff? Or Can we say that it is a standard of supply of timeshare users rights by way of accommodation? Because timeshare users right is specifically included in the definition of accommodation service. This issue was very prevalent in the initial days of GST because as Shrishti mentioned that until 18th of July 2022, the tax rate on hotel industry when it was below 1000 rupees, it was exempt. So if one has to Consider this early check-in and late check-out charges, which are predominantly lesser than 1000 rupees generally in the economy or budget range hotels. One could potentially claim the exemption from it because this qualifies to be an independent supply from the hotel accommodation. But now after 18 July 2022, since the exemption has gone, even if these are treated individually, it's if were to check charges below that slab rate of 7.5K should be at 12% rate. Again this again goes back to the same fundamental of composite versus individual supply and the issue becomes more complicated when there is a multi-day booking. As we can see the illustration on the screen, if let's say it has to be considered as a composite supply to which tax rate it should be clubbed with, whether it should be clubbed with the day when room tariff. which is a 12% or it should be clubbed with a day to room tariff which is 18% or one has to proportionately allocate the charges to the individual day one or day two predominantly what we have seen practically these are generally clubbed with early check-in is only clubbed with the day one which is the check-in day and late checkout is clubbed with the exit day in case the booking set happened partially by the user. So this issue again we are seeing up in the audits being picked up. Now, moving on to the fourth issue, which is pertaining to the interplay between restaurant and the hotel industry. So what happens if a hotel building has a restaurant inside it and if the declared tariff of the hotel exceeds Rs. 7500, it is qualified as specified premises. And the restaurant in that hotel has to charge 18% rate. and they can also avail GST input on that. In the same way, if those are below that tariff threshold, then the restaurant in the hotel should charge 5% and they'll not get the ITC benefit. Now, let's consider a situation where there's a hotel who has a restaurant. This hotel always has declared tariff below the threshold limit. But one fine day in a block of five years, let's say, the declared tariff published. exceeded the limit of 7500 rupees then what happens should the restaurant in the hotel should immediately on that day in the particular month should start charging 18% with GST input and stop charging 5% and when let's say they start charging on an immediate same day if one takes a view then when should it stop should it stop in that particular month itself should it stop in a year should it stop after a block of five years Should it stop in a particular season? There is no clarity because if you see the definition of specified services, it says that a premise providing hotel accommodation, having a declared tariff of a unit of accommodation above so-and-so limit per day. They nowhere specify that during a year, during a month, during a season, nowhere it is specified. So that becomes a practical issue. And what we are seeing on the ground because of this lack of clarity on this particular aspect, The authorities have been issuing notices to the restaurant even if on one fine day the tariff was increased above the threshold, they have been asking the 13% additional GST demand has been raised and since the input has been time barred, even that benefit is also not being available to the recipient. On this aspect, earlier there was a circular in 2018 was issued and declared tariff concept was there to levy tax rate on hotels. In that context, they clarified that if the hotel declares different tariff for different seasons or a period, then during that season or a period, you have to determine the rate accordingly. But the circular may not be directly applied here in this context because here that was predominant in the context of tariff of the hotel or the rate on the hotel sector. Now for the restaurant sector, can we apply the similar analogy to bring it at a season level and not at a year level? is yet to be seen. Now moving on to the another issue, it's very common that the hotels end up charging some fee of cancellation or they forfeit the advance amount which is paid by the user in case there is a no-show or a cancellation. The issue here is what should be the tax treatment or a classification of this amount which is being forfeited or any additional fee which is being charged for cancellation. Can it be treatise as a hotel accommodation service or whether it will be qualifying to be, say, agreeing to tolerate or refrain from doing some act. On this, there was a plethora of judgments in the context of service tax, which was predominantly ruling that there should be treatise treated as the same of the underlying service. There cannot be a different treatment for the fee of cancellation. It should be arriving its classification from the underlying service itself. And later on, even the circular under GST 178 also affirmed this view that any charges for cost incurred because the reasoning given in the circular is that the charges which are being levied to the customer, these are nothing but for the cost involved in making the arrangements for the intended supply and the cost involved which to make the supply available to the user is something which is recovered from the user. as part of cancellation and hence the treatment should be of the same nature of the underlying supply and this issue is largely resolved for the particular clarification being issued. The only thing open here is before the circular was issued there was some industry who were on a conservative note were living 18 percent GST whereas the underlying service of hotel would have been under 12 percent. Can they qualify to be or can they are they eligible to by the refund of the differential tax is something yet to be seen moving on another uh Very simple issue in the airport lounge is what happens in the lounge is there are multiple offerings which are offered by a lounge. We can see on the screen that there are comfortable seating, there are food and being served, free Wi-Fi, there are games you can play, you have entertainment services being there, there are shower and restroom available. If these services are provided individually, those will be levered at individual rates, which could be ranging from 0 to 28%. But since these are offered as a package in the lounge to the customer, what should be the tax treatment? Should it be 18% as a predominant service is the convenience or the accommodation or restaurant fee or it should be at a different treatment for individual transactions. The issue becomes more predominant because what happens some of the lounges are from the accounting perspective. They are differentiating to have a cost center based allocation, they are differentiating this amount recovered from each of these revenue streams as a top line. So this issue also has been largely resolved in the GST regime because this has been offered by all the lounges in a similar fashion. Even the customer also has the perception that they have been availing the convenience fee. All the others are more of. to make the main service as comfortable as possible. So this should be categorized as composite supply and predominant should be convenience, which is 18%. Moving on to the other final issues which happens, for example, many times it happens that a tour operator bulk buys the room from a hotel. Let's say they buy 100 room nights and they keep selling individually to the customer. The issue comes is what should be the classification for the tour operator when they are selling this particular room nights to the customer. Should it be hotel accommodation or it will be the tour operator service because there is a specific entry in the tour operator which says the reservation for hotel accommodation service is also covered in tour operator service which is under 99852. On this issue there have been contrary rulings. The Advance ruling has ruled that since the tour operator service is more appropriate classification to ascribe to this particular service so it should be qualifying as that particular entry and it should be qualifying either five or eight depending upon whether transport is also bundled with that should be at the five percent as a tour operator service or 18 percent of the general category of your operator services on the other hand if it qualifies to be hotel accommodation is it could it will be again go back to the slab based taxation depending upon the tariff if it is below than 12 if it is higher the it would be 18%. On this, while advanced living has been contrary, in our view, the entry for hotel accommodation does not differentiate who is providing this particular service. As long as the underlying service qualifies to be accommodation, if one is buying the accommodation room nights from the hotel and reselling further to the customer, should be treated in a similar fashion as like a hotel. Another interesting issue faces is this conference hosted by the host. by the hotels where they collect the charges on a per plate basis. Here the issue comes is just because the consideration has been collected as per plate basis for the food, will the character of this particular service will be restaurant service or outdoor catering service or will it be the renting of particular conference room to the tenant. Here again the plethora of judgment in the pre-GST context have held that. the valuation criteria does not determine the classification of service. Here, the classification of service has to be, again, seen from the perspective of customer, what are they intending to receive, what is predominant nature of the supply, and what is being supplied instantly to the main supply. Here, for conference-hosted, in our view, the conference rental should be the predominant supply, and the other supply which is instantly to the student should be tagged to the main supply itself. Another interesting issue is ITC eligibility on the goods and services which are being used for construction of a hotel. This issue is a very popular issue which is pending before Supreme Court right now in Safari Itteridge's judgment. Odisha High Court has given favourable ruling that since hotel is onward providing outward services, collecting revenue and GST from the customer and paying it, they should also be allowed on an inward construction also, ITC should be allowed. But let's see the ruling is awaited from Supreme Court. We need to wait and watch for the outcome. Another few issues are uses of brand by the head office. And because the hotel chain operates. in multi states in GST and GST being a state specific law, one state qualifies to be a distinct person with another. So can there be a supply between the head office who is the owner of the brand to the other distinct persons? We will see in detail in the next segment where we'll deliberate this issue in detail in the food and beverage segments. Also about the loyalty programs, we'll talk about in detail in the next segment. Go to your system. So, as you all can see on the screen, the journey, the GST journey for the food and beverage sector has evolved significantly since its inception and has achieved stability only after October 2019. So, during the initial few months of the GST implementation, the GST rate on restaurant services was determined by whether the establishment in which restaurant services are being provided have air conditioning facility or not. just like the service tax regime. However, over time the government has introduced changes to simplify the tax structure. The tax rate was later standardized with a 5% GST applied to most of the restaurants, while premium restaurants and hotels with declared tariff above 7500 are chargeable to tax at the rate of 18%. Outdoor catering services also saw changes. Initially, They were taxed at 18%, however, to provide relief to businesses and make compliances simpler. The GST rate on outdoor catering was also standardized. Currently, outdoor catering services are taxed at a reduced rate of 5% GST without input tax credit. So these adjustments have allowed the sector to stabilize despite the initial challenges posed by the evolving tax regime. So now that we have understood that typically GST is applicable at the rate of 5% on restaurant services or 18% if located at specified premises. It is important to understand the meaning of the term restaurant services. So the term restaurant services has been defined in the rate notification for services and it has four major limbs to it. So first is there should be a supply of goods being food or drink or any other article for food. which is fit for human consumption. So in simple words, if any article which is not in edible form is sold by a restaurant, it should not fall under the definition of restaurant service. Another very crucial aspect to this definition of restaurant service is that there should be some element of service involved in the supply of such goods. This means that simply providing food or drink is not enough. There must be an element of service being associated with it. Third, the service can be provided either for consumption at the premises like dine-in facility or as a takeaway. So this includes, this even includes the room service and hotels and food delivered to your doorstep. Lastly, the definition is wide enough to cover a wide range of establishments, restaurants, eating joints, messes, canteens, etc. So this ensures that all the type of food service providers. are brought under the GST regime, providing a comprehensive scope. So, in the pre-GST era, various case laws established that mere supply of food cannot be considered as a restaurant service. It is the additional element, such as serving the food, providing a pleasant ambience and offering some personal services that introduce the service component. However, on 6th October 2021, Circular 164 brought a shift in this perspective by including cloud kitchens under the restaurant services. So this is a departure from the earlier rulings as it acknowledges the cooking and delivery process as a part of the service even without traditional dine-in elements. So now I'd like to request Rahul to discuss the practical challenges which are faced by the food and beverage sector. Over to you Rahul. So now, as we saw that the restaurant service has been very widely defined, which includes any article for human consumption will be deemed to be service, regardless of whether it is served in the restaurant or is a takeaway or a door delivery. The issue emerges, fundamental issue emerges that what happens for a prepackaged goods which are supplied either in a restaurant premise or these are supplied. in a takeaway counter, let's say separately, where one can go and buy this commodity in a restaurant premise itself. So all the conditions of the restaurant service, which Shashti mentioned, are being fulfilled. The issue emerges as to what should be the classification. Will it still qualify to be a restaurant service? Then the levy will be 5%, no ITC. If it classifies as goods, then those will be taxable at the respective HSN code's tax rate, and ITC will be eligible. So what happened for this, there was an advance ruling on this context. Kundan Mishraan Bandar. There the advancing authority gave a principle that, or rather the fact pattern of the ruling was the sweets, namkeens and cold drinks were provided in restaurants as well as there was another floor where it was sold as over the counter to the customers. So the authority ruled accordingly that wherever these sweets, namkeens, cold drinks items are supplied to the customers in a restaurant. Even if as a takeaway from restaurant also, it could be built under the restaurant head to be 5% without ITC. When these are supplied from the counter on a different floor, where there is no nexus to the restaurant service or restaurant intake or outtake, they should be classified as standalone supply of goods, available at a GST rate individually, where ITC will also be available. Number 2. The judgment came from Gujarat High Court in HRPL restaurants where they ruled that in context of ice cream, that when it was ordered and supplied along with cooked or prepared foods through the outlets, they would assume the same character of the composite supply. Because since even the packed ice cream is supplied in a restaurant, it should be taxed as per the restaurant service category as 5%. Because of the divergent rulings, one has to be very careful as to what should be the classification of these particular commodities. Let's take an example, for example, Domino's, Pizza Hut or any restaurants, it's very common that they are supplying this bottled cold drink as a prepackaged only. Coke, Thumbs Up is supplied prepackaged to the end customer without serving in restaurants. When it is supplied in a restaurant to the customer, can one take a view since? it is being served, it qualifies as a goods for human consumption, it is as part of or by way of a service, it should classify to be restaurant service regardless of the individual classification for it. Why that is very important because cold drinks are classifiable at 28% plus 12% says approximately 40% tax JST rate, vis-a-vis if one has to tax at restaurant service will be 5%. So there's a huge difference between both classifications. And hence, there is a huge potential of litigation on this area. One has to be very careful as to whether these, what is the intent of parties who are supplying here? What is the nature of outlet? Because if a shop supplying these commodities vis-a-vis a restaurant supplying commodity would have a different treatment. And what is the element of service involved? Whether the heating process, whether any sort of a... process is being undertaken by a restaurant before supplying these commodities to arrive at the conclusion. So here we are seeing divergent practices being adopted even by the authorities while issuing notices. Some are treating as supply of goods, some are treating as supply of restaurant services. This issue is something where one has to evaluate all the appropriate factors and take a view on individual case to case basis. And also accordingly, maintain adequate documentation to substantiate before authorities. Moving on to the another issue with this GST on trademark users. This issue has recently seen in the media limelight especially so this is something which was issue already being there for the other sectors in real estate and others we have seen this already. What happens the authorities are taking a view that since there's a deeming fiction under GST legislation that any supply which is from the head office to the branch office, which are considered to be a distinct person for each other, are deemed to be a supply from one to another. And when the recipient is not able to take full input tax credit, then it has to be at open market value. In the restaurant context, since the ITC is not available, the authorities have been alleging that the brand is owned by the head office. Since all the documentation IP is having the address of head office, the branch office is using this. logos or the brand for their outlets and supply and there should be a cross charge happening from head office to the state branch offices and GSE should be discharged on that. particular issue brings a lot of aspects as to a lot of open questions whether trademark is registered in a particular state or whether this is registered for a company as a whole which should be should be appreciated by the authorities which has not been taken as a ground in the litigation or authorities have been just clearly only on the schedule one this issue has been particularly highlighted also there is no concept of a distinct person in the trademarks the distinct portion of demification is only coming in GST Act. When the Trademark Act is giving a copyright or a trademark for the entire company as a whole, how can one can attribute that this is being supplied from one state to another state? So this issue, GST Council should take adequate representation on this and bring clarity before this issue goes in multiple forums to get clarity upon. clarity would go a long way to resolve this issue at the ground level stage itself. Moving on to another issue, which is very interesting in this sector, what happens, there are central kitchens and there are dark kitchens. Central kitchens are the premises where there is an adequate infrastructure being installed. A lot of capital goods, equipments are installed in the central kitchen. The multi-state outneries or multi-state restaurants have the central kitchen. in few big states and they have dark kitchens in across various cities and states. What Centre Kitchen does is Centre Kitchen procures the raw materials, there is enough infrastructure, enough personnel deployed there, they will do the entire cooking process and almost the finished goods are being supplied to dark kitchen. This could be semi-cooked food which requires some further process. So dark kitchen what they'll do is dark kitchen will receive the commodities. and dark kitchen will apply some reheating process, mixing process, there are some application and then as and when the order comes, dark kitchen supply to the end customer. There's no doubt that the supply from dark kitchen to the end customer is a restaurant service which should be at 5%. Be it cloud kitchen, be it a restaurant dining service, it should be at 5% category is what clarified by the government. The principal question emerges, what happens to the supply between the center kitchen and the dark kitchen? If those are in same states, there is no supply between the same registration, that's clear. But the large question emerges when these are in a different state. Then what happens? The center kitchen cannot take generally the ITC on the procurements of raw materials. And if it is treated as a restaurant service from center kitchen to dark kitchen, they have to charge 5% to the dark kitchen. And dark kitchen again can't take input off. And then when they're supplying, they're again charging 5%. So there's a dual levy of 5% on the same food, just because one state is being cooking and doing the entire process and another state is supplying to the end customer. Is it something deliberated or there's a lack of clarity on this particular aspect? The technical issue or the fundamental issue emerges here is what is the classification of this supply between central kitchen and dark kitchen? Is it a restaurant service or... is it a supply of individual goods in a semi-cooked form to the dark kitchen? Because in large times what happens is these are the semi-cooked foods which cannot be consumed in its current form. So applying the test of the article of human consumption in the definition of restaurant service, one may evaluate a view that these do not qualify to be restaurant service and should be treated as an individual supply transaction. The moment my output supply classifies to be a goods in nature, automatically on the inward side, the IT should be eligible. So multi-state restaurant chain are someone who are facing this issue. Even if this view is something which is adopted, another practical challenge is being there to identify how much raw material is getting consumed for the interstate supply to the customers and how much. raw materials are being consumed for the supply to dark kitchens is also a practical challenge. And hence, the restaurant chains who are operating in multi-state sectors should evaluate appropriate structure to avoid this particular GST leakage of 5% in 5% rule. Moving on, another interesting aspect is, I think we all would have experienced this, when we go to a restaurant, we get a payment discount. The bill comes to us. Let's take an example, the bill came to us for 1200 rupees, the GST increased 5%. The total amount in the invoice is 1260. When we are making the payment, we go to Dynout, Gold, etc., multiple payment apps. and we get a payment discount of 25% itself. So bill amount in this example 1260, I get a discount of 25%. I am ending up paying 75% of the bill amount to the restaurant. There are multiple models in which this discount amount is being born. In some cases, the application owner is bearing this amount to promote the application. In some cases, it has been split between restaurant and the application owner. But in large cases, what we have seen that this particular discounts are being borne by the restaurant itself. So these are nothing but a discount which the restaurant would have given to the end customer. If these are own inverse discount, section 15 clearly allows me to take a benefit of adjustment of a discount on this particular supply. Practically what we are seeing here, there's a challenge of disclosing own inverse discount because the discount is linked to the total. amount of invoice but one has to take a proper call and evaluate a situation whether what should be the alternate ways in which the GST adjustment can be claimed on this discount being offered because here the amount received by the restaurant is quite lower as compared to the GST amount only GST is quite high. Moving on to the another interesting issue where DGGI has been very active on this issue and we have seen to lot of bakeries DGGI has issued notices. There are multiple scenarios here one can see. There are bakeries which does not have any serving facility, there are bakeries who have serving facility and there are bakeries who produces cakes only on the pre-order and there are bakeries who have the cakes available. You can go and buy the cake just like any other goods. You go to bakery, you buy a cake and you come. For the bakery, if we see the definition of restaurant service, it was very widely defined. Any article for human consumption, whether door delivery or supplied as a takeaway, was also qualifying to be as a restaurant service. Cakes, bakery items also qualifies to be a food or article for human consumption. So can one take a view that it's a restaurant service itself and should be at a 5% without ITC or because because In few of the scenarios, the bakery are keeping the standard cake available at their outlet. One can just come and take the cake and go. It should be qualifying to be over the counter sale of cakes and desserts and should be qualifying at the respective HSM classification and classifying at the 18% rate. On this, what we are seeing is the authorities have not been distinguishing the each and every character. The standoff authorities have been that this entire supply of cakes, desserts and all should be at 18% rate as individual standalone supply of goods and should not be a restaurant service. But one should really evaluate and see the underlying facts of the case because applying the judgment of the Madras High Court as we saw in the beginning, the principle coming out from the court says if there's a serving facility being available, the outlet becomes a particular restaurant service. It qualifies to be a restaurant service which is other than specified premise or within the specified premises depending upon the rate character. So since the subject message is being available, one has to give an adequate weightage to the particular factor and take an appropriate call accordingly. There cannot be a standard rate applicable to the cake or these commodities straight away. We have to go deeper into the relevant fact of the case and then accordingly determine the classification. The next issue is on packaging charges on the e-commerce operator supplies. As we know that the restaurant service is something which is notified under section 9.5 on which if a restaurant is supplying restaurant service through an e-commerce operator, the e-commerce operator has to pay GST under, we call it reverse charge practically. Let's take an example. There is an invoice on which... The restaurant is charging restaurant service or the food amount is 500. The packaging charge is some percentage of the food amount which is levied by the restaurant. And then there's a total amount on which GST is being charged. The classification of the packaging charge is not under dispute because that qualifies to be composite supply and hence should be the same character of the principal supply. But the main issue emerges if we go to the definition of section 9.5 and also the notification where the specified categories of services are being notified for the e-commerce operator to pay GST. they only specify the supply of restaurant service do not specify that supply of restaurant service and all other NC supplies which are supplied by the restaurant along with this hence because of this particular literal interpretation in the notification entry we are seeing practically there has been divergent practice being involved being adopted by multiple players what happens if the ECO is discharging taxes on the restaurant service and the other charges which the restaurant is operating those are being disbursed to the restaurant they are withholding the issue is withholding tcs one percent on these additional charges and the liability levy is being shifted commercially on the restaurant to pay gst on so here when i should be very careful and evaluate the appropriate position because nine five clearly says that the law will be applicable to the e-commerce operator as if he is a supplier liable to pay tax. Would that mean that all the other law that composite, mix supply, the classification, everything will be as applicable to the supplier would be applicable to the e-commerce operator also. Moving on, another issue which is very practical is the service charges on alcohol supply. What we see there are restaurants who are supplying alcohol as well as food. alcohol is out of levy of GST, VAT is applicable on that. But what happens is service charge is collected as a percentage of the total invoice amount. So service charge is there on the food will also, there's a food, there's no alcohol value also. There's no doubt that there should be no GST on the alcohol value. There should be VAT being charged. But the issue emerges is what should be the treatment, what should one charge on the service charge on the... element of alcohol value. In this example, on the 1000 rupees, the 10% service charge, 100 rupees, what should be the treatment, whether it should be liable to GST, whether it should be liable to VAT. There are two major views coming on this particular issue, which we have seen practically adopted. One, that it should be proportionately attributed. The amount attributable to alcohol should be clubbed with the alcohol and VAT should be levied on that amount. And second is that this because the GST implementation has abolished the entire framework on all GST, all goods and services supply GST has to be applicable. And hence, even on service charge, since it qualifies to be a service, should be levied to a GST and not VAT. So on this also, what we are seeing practically, there is pretty much being followed across the industry for levying food. and alcohol bill separately and the alcohol bill on service charge one has to take up appropriate call before the this is something which is being written by the authorities. Moving on to another issues we'll move on to next one. So the other final issues under GST on food sector is stock transfer from of kitchen equipment. or other assets from one state to another. Again, we spoke about that any supply from one state to another state qualifies to be a deemed supply between distinct persons, should be available to GST. So what happens if one state procures kitchen equipment and they are supplying those kitchen equipment after uses, after let's say one, two years down the line to the another state of the same legal entity? On the inward side, they are not available ITC because of the restaurant service restriction of 5%. On the outward side, one has to charge GST because this qualifies to be supply of goods between one state to another state. And another state also, the recipient state can't take input of because, again, this will be used for the restaurant supply. And 5% is, again, conditional. Then no ITC is available. So, essentially, this stock transfer of used equipment from one state to another state is... creating a GST leakage of dual time levy on the one supply and creating a loss in the hands of the restaurant sector. And similar to motor vehicles, the government has been proactive in identifying the particular issue and they have given a margin scheme for motor vehicles. And there's a scheme for second-hand dealer of used commodity, whether that can be applied for a restaurant, whether the restaurant can be considered to be a second-hand dealer. for this supply of equipment is something which is to be evaluated. Another issue is when this all-inclusive packages are being offered by a restaurant which includes entertainment events, food, drinks, music and there's a composite package amount being charged. Again here the issue is whether it's a composite supply, mixed supply or the standalone supply because here the individual supplies are taxable at different individual rates. This issue was predominantly relevant till September 30, 2021 because till that time the entertainment activities were under 28% levy. Afterwards the levy has been shifted and the levy became 28 to 18 percent because most of these services are qualifying even if as a bundle or a mix supply at 18 percent so this issue is something which has been resolved by way of a rate reduction on the entertainment services another issue comes as we saw in the hotel segment that if a hotel is supplying breakfast as complementary along with the tariff qualifies to be composite supply and hence the rate of hotel should be applied on the entire bundle that means 12 rate is being applied or 18 is applied and there is no condition of the itc restriction and hence whether the restaurant in a hotel can avail the proportionate credit on the raw materials and services being used for the food which is being consumed in the complimentary breakfast given to the customer or the meals which are being supplied as packages for accommodation. Technically, we don't foresee any issue, it should be eligible, but there are practical challenges faced by the restaurant as to how to identify this particular value on which they can take ITC. Another issue comes is how to treat the bundle supply of cake and food together by a, let's say, cake outlet to the customer. What we are seeing as we highlighted that DJGI has been taking a uniform view that supply of cakes are a supply of goods taxable at 18% rate and these are not getting the benefit or the treatment of restaurant service at 5%. So once these are supplied as an add-on along with the food to the customer, what should the treatment is something on which the client is awaited. And the fundamental issue which the industry has always been grappling with is the wastage. How should that be treated? Because we saw that a restaurant who is in a hotel premise having a higher declared tariff, they are eligible to take ITC. In a restaurant sector, what happens is there is always a wastage of food which is expired or produced but not sold. What happens? Do they need to do a reversal under 17.5H? Or can they take a view that these wastages are something which are normal in nature and should not warrant any reversal? So again here... In our view, the normal wastage should not be warranted an ITC reversal. Only for the abnormal wastage, one has to look into detail what is the reason of this particular wastage and then evaluate the requirement of reversal of ITC. Now we will move on to the third and the most emerging sector, which is co-living. Let us see the legal framework, how this has evolved over the time for the co-living sector. So, from the advent of GST, the co-living sector has been one to keep an eye on. While the law was very simpler when it was initially introduced with just a few entries determining the taxability for the entire sector, an entry for exempting the renting of a residential dwelling and an entry to levy GST on the accommodation services, the tariff exceeded Rs. 1,000 per day. Most players in the co-living sector did not worry about GST then as there was no GST on the rent paid to the landlord and again no GST on the rent charged to the end customer considering the entire thing to be as renting of residential dwelling. However, the entire framework changed on July 18, 2022 when the renting of residential dwelling was brought under the purview of reverse charge. So, this threw the cat among the pigeons. So, This was a huge hit to the players in the co-living sector. As we all know, the co-living sector follows a comp pricing, comp tax pricing, which means that the price to the end customer is fixed. Now, since the price is fixed, but when the property is taken on rent from the landlord, the company is required to pay GST under reverse charge. Additionally, given that the output supply was not levyable to GST, this RCM paid becomes a cost to the company. So this threatened the players to even they evaluated to exit the industry and creating a blockage for the new entrants in the industry. So this is when certain new models were developed in the industry, which we will be discussing in a few minutes. But before we delve deep into that, there was another change that was brought in recently on July 15, 2024. So however, this time the intent of this change was to bring more clarity as to what is renting and what is accommodation. So during the two year period between July 18, 2022 and July 15, 2020. There were a few rulings which deemed that hostel services are akin to renting of residential dwelling. So to put an end to such interpretations, the exemption for renting of residential dwelling was modified to clearly exclude the accommodation service from the purview of residential dwelling. So services such as hostels, PGs and other related services were deemed to be accommodation and not residential. Thank you. Additionally, any accommodation services provided having value of less than Rs. 20,000 per month per person and supplied for a continuous period of 90 days was exempted from the levy of GST. But just like most of the other clarifications on the GST, rather than providing a complete clarity, this new change also led to more questions which I would like to request Rahul to throw a light upon. As we saw that there has been recent amendment in this entry which they have introduced entry number 12A which says that there is a new exemption if with the dual condition that the accommodation charges should be up to 20,000 per person per month and there is a condition that it should be for a minimum continuous period of 90 days. Now let us look at that this particular entry what areas or what challenges the centre is creating for the co-living players. When the builder owners or the landowners have opted for this exemption, would they be required to discharge GST on the entire deposit collected when the tenants vacate the premise within 90 days? What we are seeing practically that on ground generally in this industry, the locking period is of one month and you collect... the fee there is always an intent of long-term stay but in this lock-in of one month there could be a scenario where the tenant exits the premise within the period of 90 days so can one take a view or can the authorities say that you have to pay gst on that prima facie yes because the strict condition of the entry that it should be for a continuous period of 90 days is getting broken and hence one may have to pay gst on that but it is possible to mitigate the risk basis certain safeguards which someone can build in the contract and hence this aspect should be looked at on a case-to-case basis another issue this entry pause is can the limit of 20 000 per month be levied for each bed rented out or it should be seen as a room as a whole because the entry nowhere specify that it could be for a bed or per room as such, they're only saying it should be per person per month. So the most common view emerges from this entry is as long as let's say you are renting out two different persons, a single room on a bed basis, you will have to apply this entries exemption for individual person level and you need not to categorize at a room level. Another issue which is there in this is let's say one person takes the room for three months and the rent is 20,000 per month below only but in totality so it exists 20,000 for example let's say a corporate customer who taken three individual rooms in a hostel or a PG now do you have to look at this term per person for each room or for each accommodation service as a whole provided to a person. If we interpret that the person must be for the entire accommodation service provided, what if the company has rented out two rooms in two different buildings to the same person, then one can't take a view that it has to be per person the amount is exceeding 20,000 rupees. Therefore, there's no clear answer to this question. We might have to wait for the judicial precedent or any clarification on this particular aspect. But in our view, if contractual agreements with one person is on an individual basis, one may have... can take a view or evaluate a view that should be done on a person plus unit level together. Here one can also draw a reference from a RWA circular. That circular clearly clarifies that this exemption for RWA to a tenant is for per person or per unit owner. But they have told if a unit owner has more than one flat in an apartment and he is paying maintenance charges for two apartments together. then it has to be seen at a unit level as well as at the parcel level. So the exemptions will still be available if for the per flat this is below the limit. So one may draw an inference from that particular clarification also in this context to evaluate what should be the appropriate view. Another important question emerges is that does this rate of Rs. 20,000 per month refer only to the rate of renting of bed or it is all-inclusive prices which could include renting of bad food, other amenities, maintenance given to this tenants or students. Generally, what we see that the industry follow a practice of all strategies, but on the invoice, the breakup is being given that what component is towards the rental, what component is towards the other amenity charges. When such a practice is followed, one can possibly contain that the rate per month should only be for the accommodation service. and it should not include the other amenity charges. The other service can still be classified as the individual rates applicable. Further, one should also look at whether this supply would qualify to be a composite supply or a mixed supply or a standalone supply in the particular industry. Food and maintenance might be mandatory to be opted for accommodation in few sectors like hostels. but it might not be a mandatory condition in a co-living sector where working class is being seen. Therefore, this aspect again needs to be analyzed on a case-to-case basis to have an appropriate view for a position being taken. Another last but not the least issue comes that what happens when a supplier of accommodation service charges GST from the beginning of the rental period but the tenant stays more than 90 days. in a particular hostel or a PG. Then technically the supplier is eligible for this 2LA exemption given above because this rental is less than the threshold limit plus the stay also is a continuous period of 90 days. Initially at the time of entering the contract the parties were not aware for some reasons that the stay will go more than 90 days and GST has been charged by the supplier and the GST be claimed as a refund. from the government is a question. One can legally challenge that it would be eligible, but practically one may face a problem in claiming the refund of those GST being paid. And hence one has to be very careful in maintaining the documents and contracts in such a way to avoid such situation as much as possible and if the refund situation arises, the document should also support the view and accordingly refund can be claimed. Now let's move on to the typical models which are being adopted in this industry and what are the typical issues in these models which industry players faces. One of the most popular model is the platform model. What happens in the platform model is the owner of the property, they list their particular units on the e-commerce marketplace platform to generate the leads and find a particular tenant on the platform. Once the property is identified and selected, the particular owner enters into a lease agreement with the tenant directly. While the marketplace may facilitate this arrangement, but essentially the rental agreement happens between the owner and the tenant directly. So considering that owner is providing this accommodation service or you call it a rental of residential dwelling services to the tenant directly, whether he's qualifying or whether it is eligible to claim the exemption under either entry number 12 or 12A. Now since these, if these are paying gas or hostel accommodation, entry number 12 has clearly excluding those scenarios because of the explanation being inserted effective from July 2024 that this will not classify under the renting of residential dwelling. Rather, one can take an exemption in the another entry which is inserted recently. subject to the dual conditions of the threshold limit and the continuous period stay is being fulfilled. And what happens in this model is the platform is providing the amenity or other maintenance charges to the customer directly. And one would say that even these maintenance charges are ensured to the accommodation service and hence even the platform should be eligible for the exemption 112A separately or this cannot be equated with the accommodation service because there are two different suppliers here. So, that's the problem. This issue is something which is again not yet tested before the authorities. We are seeing some level of litigations at the GST audit level. Authorities have been picking up, but this model will require a watertight documentation to support the kind of services being provided and the classification what one can adopt. Now moving on to the another model, which is again predominant in the industry is leasing lease out model. What happens here, there are let's say two companies, PropCo is the owner of the particular building or a premise, OpCo is the entity who is giving it on rental to the customer. So OpCo takes essentially on main lease from PropCo and operating companies further leasing out sub leasing to the customer. In that case, the first and the foremost issue emerges is that whether the operating company who is taking the residential dwelling on rental from the propco is required to pay GST under reverse charge or not. Let's assume that the operating company on the outward side are eligible to claim the exemption and hence they are the service provider who are exclusively providing exempt services hence not required to take a decision under section 23 and so they are the unregistered person. whether the operating company will be required to take registration only for the purpose of paying this GST and the reverse charge on the taking the renting of property from PropCo or one can take a view that the exemption notification or the RC notification is referring that recipient has to be registered person at the first place to even follow the entry of reverse charge and hence since the recipient here operating company is not liable to take a registration because the output supply is exempt and hence even the RCMNT is not applicable at the first place. The issue becomes more relevant in the case where operating company let's say there are few rooms which they are supplying which are not classifying under the exemption of 20,000 per unit per person. Let's say there are few rooms they are supplying to customers which are above this threshold so they are not providing exclusively exempt supply and required to take registration. When the operating company registered, whether they will be required to pay a reverse charge on the rental of the entire property, I think it will be very difficult to say no, because they are registered person and the RCM entry will be squarely applicable on the operating company. But the real issue or the logical issue emerges, let's say operating company is 100 rooms, but out of 100 rooms, only one room is exceeding the threshold because of that they are required to take registration. Because of one room is... crossing the threshold, they will have to pay reverse charge on the entire inward leasing of the property, which would again lead to the additional cost in the hands of operating company because they will not be required or be eligible to take the proportionate credit. And hence, the particular GST will become a cost in the supply chain to the end customer, which may not be the intent of the legislation of providing this exemption entry because the entry was the preamble to the GST Council meeting clearly said that They intend to give relief to the working professionals and the students and hence this particular exemption is being provided when this is qualifying to be the dual condition criteria has been fulfilled. One has to wait and watch and lobby before the government that this issue is something which they clarify that when on the outward side there is exemption being availed, on the inward side also the proportion exemption should be eligible to be given to the operators. to avoid this GST button on the working class professionals. With this, before we wrap up, I think if there's any questions on the chat window. Yeah, I don't think there are any major questions. There were a few questions which we have replied on the chat itself. So we are good to wrap up. Before we wrap up, I just want to take this moment to thank all of you. Thanks the entire. X-Men team and all the participants who have joined. I hope you would have found this session valuable and this can navigate. the complexity under GST with greater clarity and confidence. Feel free to reach out to us if you have any other questions and audience who are seeing this in other platforms not Zoom. Feel free to reach out to us on the contact details given. We'll be happy to clarify any questions which you have. Once again, thank you for the participation. Have a great day ahead. Over to you, Shiva. Thank you CA Rahul Bansari for enriching our understanding with your insightful presentation. We greatly appreciate your effort in making this session a success. We would also like to thank all participants for their time and cooperation. Your engagement is invaluable to us. While we endeavour to address all queries during the session, please do not hesitate to send any additional questions or feedback to connect at the rate taxman dot com. Thank you once again. We look forward to discussing another important topic with you very soon. Until then, take care and have a wonderful evening. Thank you. Thank you.

Thank Good evening everyone. We sincerely appreciate your presence today. Welcome to our webinar on GST challenges in the hospitality sector, roadblocks and remedies.

My name is Shiva Bharti and I am representing team TaxMath. Our core services encompass publishing, maintaining legal research platforms and delivering compliance solutions and training to professionals and students. We are delighted to host this live session as part of our commitment. providing corporate and legal professionals with accurate and authentic information.

I am honored to introduce our distinguished speaker for today's session, CA Rahul Pansari. He is a seasoned chartered accountant and cost and management accountant, hosting over a decade of specialized experience in indirect taxes. He has achieved distinguished All India ranks in both the CA and CMA exams.

He is adept at providing strategic tax advice across multiple sectors, such as real estate, e-commerce, hospitality, manufacturing, IT and ITES. His diverse background includes key managerial roles in industrial and consulting arenas. Currently, he heads the indirect tax division at Eka Advisors India LLP, where he continues to enrich the GST community by demystifying complex legal nuances and sharing valuable insights. Before we commence, please note the following instructions to ensure a seamless experience.

Your microphones will be muted throughout the session. You are encouraged to post your question in the chat box. Queries will be addressed during or after the presentation. A copy of today's presentation will be emailed to you for your future reference.

Without further ado, let us welcome our esteemed guest to the virtual stage. Over to you, sir. Thank you.

SHIVA SINGHALANI-Thanks, Shiva. And a very warm evening to everyone who have joined the webinar. And welcome to you for the webinar on Navigating GST Challenges. in the hospitality sector, roadblocks and remedies.

So when we talk about this term hospitality, it encompasses a vast segment of service industry which covers multiple sectors. The top one includes accommodation, food and beverages, travel and tourism and entertainment. At its heart, the Indian hospitality sector is deeply rooted in the philosophy of Atithi Devobhava which translates to treating guests with utmost respect.

as one would treat the god. On a macro level, this sector has been a key driver in the Indian economy contributing significantly through employment generation, forex earnings and infra development. The contribution of this sector in the economy, you can very well see the numbers on the screen which are the real contributor and the numbers have been quite evident in showing that.

What sets the industry apart from any other sector is its discretionary pricing to the customers and also the intense focus on customer experience to make as delightful as possible. Now moving on to the GST on this sector, this sector has been faced numerous amendments, clarification, advanced rulings over the past seven years of GST implementation. While GST has been overall beneficial in this sector in terms of reducing cost to customers.

and harmonizing the tax rates from a hotel perspective. It has also brought some of the challenges like the breakage of seamless flow of credit, especially because in the hotel due to multi-state operations. And also there are some issues which still remain unresolved today. Without much time, we'll move on to the agenda of the webinar today. We are going to dwell deeper into three major sectors of the industry, which are hotel, food and beverages and number three school living sector.

What we are going to see in the webinar is how the legislative framework has evolved over the time for these three sectors and what are the practical challenges. be it basic, be it advanced or a complex problem, they have evolved over the time and which these sectors are still grappling with right now. In fact, two of the issues what we are covering today have already been under litigation and right now pending at different forums before authorities. That is why it is the appropriate time to reevaluate and revisit the positions being taken on these controversial issues to ensure that the positions are fully defendable in case these are questioned by the tax authorities.

So let's now deep dive into individual sectors starting with the hotel sector. Over to you Sistah. Yeah, so as we know the hotel sector has a dynamic ecosystem where generating revenue involves much more than just room bookings. So traditionally room rental has been the primary source of income for hotels.

However, with time, the revenue streams have evolved. The revenue streams for a hotel can be broadly classified into three broad categories. First being the accommodation services, which includes room tariffs, additional bed charges, early check-in charges, late checkout charges, etc. Then comes food and beverage services. So, food and beverage services is one of the major revenue drivers in a hotel.

Restaurants, bars, in-room dining services, banquet catering are the major constituents of this segment. Then there are certain ancillary services which are provided by a hotel to its guests to increase the overall experience of their stay. So these include spa treatments, wellness treatments, laundry services, airport pick and drop facilities, guided tours etc etc.

Now that we have seen What are the various streams of revenue for a hotel? And before diving deep into the roadblocks that are faced by a hotel, let us discuss the journey of the accommodation sector under indirect taxation. So before the advent of GST, the hospitality industry grappled with a complex tax system, burdened with multiple levies from both state and center.

Center used to levy service tax and state used to levy luxury tax. Then came July 2017 and with it came goods and service tax or how we call GST. So this introduction of GST was a game changer for India's taxation system and the accommodation sector felt the significant impact on it.

So under GST, we saw the introduction of a tired rate system for hotels. The tax rates were initially based on declared room tariffs. However, this led to a lot of industry-wide representations, discussions and protests before the GST Council.

In fact, we have also helped some of our clients in lobbying before the GST Council for this issue. So after nearly a year of persistent efforts and protests, an amendment was made. Not an amendment, a very important amendment, I would say.

So now, instead of declared tariffs, the gst rates are determined on the basis of actual transactional value so this change has brought in more clarity and fairness to the system thereafter in october 2019 there was yet another significant update the gst rates were further rationalized merging the existing tax slab existing slabs into three and eliminating the 20 subsequently in july 2022 the exemption from gst for the below thousand limit was removed simplifying the tax structure to just two slabs so at present there's a 12 percent gst for rooms with an actual value of up to 7500 and an 18 percent gst for those above 7500 so as you can see from the on the screen the actual room charge across all the time frames is 7000 however the total bill amount differs significantly. So from 8330 in the pre-GST era to 8960 during the first year of implementation of GST to 7840 currently. So there have been quite a lot of changes. Further, during the first year of implementation of GST as we discussed, the GST rate was dependent upon declared tariff and declared tariff tends to tended to fluctuate on the basis of seasons, demands and various other reasons.

So, which has also led to a lot of questions being raised by the GST authorities on the aptness of the GST rates that are being charged. So now that we have discussed this, I would request Rahul to take us through the practical challenges and the issues that are being faced by the hotel sector. Sure. So as we saw, there are multiple offerings this hotel offers to the customers.

Due to this multiplicity of offerings, one of the biggest challenges hotel industry faces is how to determine the classification and the applicable rate of GST on. these offerings. So let's take an example. Let's say there's a hotel who is having three categories of rooms. We can see on the screen, first one being standard, then deluxe, then the premium package.

The deluxe room or the rather first one, the standard room, how it is offered is it's only the room. Everything else is given as an add-on, which is at the choice of the guest, he can either pick or not pick. Even if he picks that particular thing, it will be at the individual prices as well as individual tax rates. However, in the composite packages, there will be no choice given to the customer.

If he takes the premium package, he cannot pick and choose the individual offerings. Rather, he has to take the entire package as a whole. Now, what happens, for example, in the first package, if someone takes standard package, we can take example, let's say 7,000 is for the room and 700 is charged for the meal.

Practically how the hotels have been tackling this because these are offered as an add-on to the customer, the room will be chargeable at the rate of accommodation service. Since it is below the limit of 7500, it will be at 12%. Then breakfast, since it's a meal provided separately as an add-on, it will be chargeable at the respective rate, which is 5%.

So effectively 7000 is at 12%, 700 is at 5%, which practically what we are seeing, authorities have been disputing this. tax levy and they have been creating this as a composite in nature with the simple reason that generally breakfast is clubbed with the room and you cannot artificially separate it to take a benefit of a lower rate on meal and other nor take the total value in the tariff computation also. So and what happens for deluxe package since room and breakfast are given together here there is no doubt that it should be treated as a composite supply.

the entire package value should increase the tariff amount and accordingly the tax rate should be determined and what happens for the luxury room package because there are multiple offerings and this only becomes important when let's say the package value is less than 7500 rupees for a unit value because some of the ingredients in the package are if supplied individually are chargeable at 18 percent can one still take a benefit of composite supply and charge the entire package at 12% with a simple reason that there is no choice available to the customer to pick and choose. This is the standard package offer to the customer without any curating available to the customer. And what also happens if let's say someone upgrades from one package to another package, another layer of complexity. So the answer to these questions what I have posed lies in the fundamental concept of composite, mixed and individual supplies under GST.

Even CBSE has clarified that there is no straight jacket formula which can be applied to determine whether it's a composite, whether it's a mixed supply or whether it's a standalone supply. It depends upon multiple parameters, multiple factors as to how the customer perceives the supply, how the other industry players in the segment offer this particular offering and how the predominant element of the supply is been. Also the recent circulars predominant in the context of warranty and other area, they have also given importance to the other factor which is the timing of the supply. Whether this particular add-on supply or the entry supply has been offered at the same time when the main supply has been offered, then the principle emerging from the circulars are that it should be treated as composite in nature. Otherwise if it is added on separately at the end of the event.

then it should be treated as standalone supply, available at the individual rate. Accordingly, one needs to be very careful while determining what should be the appropriate classification, depending upon the fact of each case, and also maintain adequate documentation. Because what happens, these are getting investigated or audited after a few years down the line.

That time to substantiate that this was how it was offered to customer as an add-on or as a package becomes slightly difficult. and hence the appropriate evaluation and the documentation is the key here moving on Another issue which is very interesting is how the pricing strategy can influence tax outcome. What happens typically in this industry is the inclusive price is offered to the customer.

For example, we can see the 8500 rupees is the price which is offered to the customer, let's say on a marketplace website. Now it is sold to the customer. Now when it comes to the hotel, now what amount should be charged?

The tax rate notification gives the base value. and not the inclusive value to determine the tax rate. Now, the all inclusive price charge to customer is 8500. One has to back compute and to calculate the GST amount in scenario one, let's say if I compute, computing 12%, the amount comes 911. And the base value becomes more than 7500 rupees.

So as per the notification, since the base value is higher than 7500 rupees, it should be liable to 18% tax. Similarly, if I back compute the all-inclusive price charge at 18% rate, the base value arrives at which is lower than 7500. So can I opt for 12% rate? This is something which is a problem in any slab-based or tier-based tax rate mechanism.

It is also similarly there in apparel and footwear industry where the pricing determines on the slab of 1000 rupees if it is below its lower rate, higher at the higher rate. So what should be the solve of this problem? Because you can see on the right side of the screen that if the base value is increased by one rupee, the taxes increased by almost 451 rupees. So what should be the solution to this? I don't think there's any technical solution to this.

The only solution is the sales team should be sensitized enough that to avoid keeping the all inclusive prices between this range of 8400 to 8851. Anything between them should automatically come down to 8400 or rather increment to 8500 so that the appropriate GST rate can be computed and there is no tax leakage. This scenario is a clear-cut example as to how the tax outcome play an important role in influencing the pricing strategies. Moving on to the third issue which is very practical and very interesting which I think we all would have faced this. This is a very common phenomenon that we reach the hotel, if we reach early, we request for the early check-in. Sometimes it is given complimentary without charges.

If it is with no consideration, there is no GST, there is no question about it. But there are situations where the hotel charges for this early check-in or beat a late checkout while checking out. Now the question comes that whether it is a standalone supply or is it a composite supply applicable to the same rate of what was to the room tariff? Or Can we say that it is a standard of supply of timeshare users rights by way of accommodation? Because timeshare users right is specifically included in the definition of accommodation service.

This issue was very prevalent in the initial days of GST because as Shrishti mentioned that until 18th of July 2022, the tax rate on hotel industry when it was below 1000 rupees, it was exempt. So if one has to Consider this early check-in and late check-out charges, which are predominantly lesser than 1000 rupees generally in the economy or budget range hotels. One could potentially claim the exemption from it because this qualifies to be an independent supply from the hotel accommodation.

But now after 18 July 2022, since the exemption has gone, even if these are treated individually, it's if were to check charges below that slab rate of 7.5K should be at 12% rate. Again this again goes back to the same fundamental of composite versus individual supply and the issue becomes more complicated when there is a multi-day booking. As we can see the illustration on the screen, if let's say it has to be considered as a composite supply to which tax rate it should be clubbed with, whether it should be clubbed with the day when room tariff.

which is a 12% or it should be clubbed with a day to room tariff which is 18% or one has to proportionately allocate the charges to the individual day one or day two predominantly what we have seen practically these are generally clubbed with early check-in is only clubbed with the day one which is the check-in day and late checkout is clubbed with the exit day in case the booking set happened partially by the user. So this issue again we are seeing up in the audits being picked up. Now, moving on to the fourth issue, which is pertaining to the interplay between restaurant and the hotel industry. So what happens if a hotel building has a restaurant inside it and if the declared tariff of the hotel exceeds Rs. 7500, it is qualified as specified premises. And the restaurant in that hotel has to charge 18% rate.

and they can also avail GST input on that. In the same way, if those are below that tariff threshold, then the restaurant in the hotel should charge 5% and they'll not get the ITC benefit. Now, let's consider a situation where there's a hotel who has a restaurant.

This hotel always has declared tariff below the threshold limit. But one fine day in a block of five years, let's say, the declared tariff published. exceeded the limit of 7500 rupees then what happens should the restaurant in the hotel should immediately on that day in the particular month should start charging 18% with GST input and stop charging 5% and when let's say they start charging on an immediate same day if one takes a view then when should it stop should it stop in that particular month itself should it stop in a year should it stop after a block of five years Should it stop in a particular season? There is no clarity because if you see the definition of specified services, it says that a premise providing hotel accommodation, having a declared tariff of a unit of accommodation above so-and-so limit per day.

They nowhere specify that during a year, during a month, during a season, nowhere it is specified. So that becomes a practical issue. And what we are seeing on the ground because of this lack of clarity on this particular aspect, The authorities have been issuing notices to the restaurant even if on one fine day the tariff was increased above the threshold, they have been asking the 13% additional GST demand has been raised and since the input has been time barred, even that benefit is also not being available to the recipient. On this aspect, earlier there was a circular in 2018 was issued and declared tariff concept was there to levy tax rate on hotels. In that context, they clarified that if the hotel declares different tariff for different seasons or a period, then during that season or a period, you have to determine the rate accordingly.

But the circular may not be directly applied here in this context because here that was predominant in the context of tariff of the hotel or the rate on the hotel sector. Now for the restaurant sector, can we apply the similar analogy to bring it at a season level and not at a year level? is yet to be seen. Now moving on to the another issue, it's very common that the hotels end up charging some fee of cancellation or they forfeit the advance amount which is paid by the user in case there is a no-show or a cancellation. The issue here is what should be the tax treatment or a classification of this amount which is being forfeited or any additional fee which is being charged for cancellation.

Can it be treatise as a hotel accommodation service or whether it will be qualifying to be, say, agreeing to tolerate or refrain from doing some act. On this, there was a plethora of judgments in the context of service tax, which was predominantly ruling that there should be treatise treated as the same of the underlying service. There cannot be a different treatment for the fee of cancellation. It should be arriving its classification from the underlying service itself. And later on, even the circular under GST 178 also affirmed this view that any charges for cost incurred because the reasoning given in the circular is that the charges which are being levied to the customer, these are nothing but for the cost involved in making the arrangements for the intended supply and the cost involved which to make the supply available to the user is something which is recovered from the user.

as part of cancellation and hence the treatment should be of the same nature of the underlying supply and this issue is largely resolved for the particular clarification being issued. The only thing open here is before the circular was issued there was some industry who were on a conservative note were living 18 percent GST whereas the underlying service of hotel would have been under 12 percent. Can they qualify to be or can they are they eligible to by the refund of the differential tax is something yet to be seen moving on another uh Very simple issue in the airport lounge is what happens in the lounge is there are multiple offerings which are offered by a lounge. We can see on the screen that there are comfortable seating, there are food and being served, free Wi-Fi, there are games you can play, you have entertainment services being there, there are shower and restroom available.

If these services are provided individually, those will be levered at individual rates, which could be ranging from 0 to 28%. But since these are offered as a package in the lounge to the customer, what should be the tax treatment? Should it be 18% as a predominant service is the convenience or the accommodation or restaurant fee or it should be at a different treatment for individual transactions.

The issue becomes more predominant because what happens some of the lounges are from the accounting perspective. They are differentiating to have a cost center based allocation, they are differentiating this amount recovered from each of these revenue streams as a top line. So this issue also has been largely resolved in the GST regime because this has been offered by all the lounges in a similar fashion.

Even the customer also has the perception that they have been availing the convenience fee. All the others are more of. to make the main service as comfortable as possible.

So this should be categorized as composite supply and predominant should be convenience, which is 18%. Moving on to the other final issues which happens, for example, many times it happens that a tour operator bulk buys the room from a hotel. Let's say they buy 100 room nights and they keep selling individually to the customer. The issue comes is what should be the classification for the tour operator when they are selling this particular room nights to the customer. Should it be hotel accommodation or it will be the tour operator service because there is a specific entry in the tour operator which says the reservation for hotel accommodation service is also covered in tour operator service which is under 99852. On this issue there have been contrary rulings.

The Advance ruling has ruled that since the tour operator service is more appropriate classification to ascribe to this particular service so it should be qualifying as that particular entry and it should be qualifying either five or eight depending upon whether transport is also bundled with that should be at the five percent as a tour operator service or 18 percent of the general category of your operator services on the other hand if it qualifies to be hotel accommodation is it could it will be again go back to the slab based taxation depending upon the tariff if it is below than 12 if it is higher the it would be 18%. On this, while advanced living has been contrary, in our view, the entry for hotel accommodation does not differentiate who is providing this particular service. As long as the underlying service qualifies to be accommodation, if one is buying the accommodation room nights from the hotel and reselling further to the customer, should be treated in a similar fashion as like a hotel. Another interesting issue faces is this conference hosted by the host.

by the hotels where they collect the charges on a per plate basis. Here the issue comes is just because the consideration has been collected as per plate basis for the food, will the character of this particular service will be restaurant service or outdoor catering service or will it be the renting of particular conference room to the tenant. Here again the plethora of judgment in the pre-GST context have held that. the valuation criteria does not determine the classification of service.

Here, the classification of service has to be, again, seen from the perspective of customer, what are they intending to receive, what is predominant nature of the supply, and what is being supplied instantly to the main supply. Here, for conference-hosted, in our view, the conference rental should be the predominant supply, and the other supply which is instantly to the student should be tagged to the main supply itself. Another interesting issue is ITC eligibility on the goods and services which are being used for construction of a hotel.

This issue is a very popular issue which is pending before Supreme Court right now in Safari Itteridge's judgment. Odisha High Court has given favourable ruling that since hotel is onward providing outward services, collecting revenue and GST from the customer and paying it, they should also be allowed on an inward construction also, ITC should be allowed. But let's see the ruling is awaited from Supreme Court.

We need to wait and watch for the outcome. Another few issues are uses of brand by the head office. And because the hotel chain operates. in multi states in GST and GST being a state specific law, one state qualifies to be a distinct person with another. So can there be a supply between the head office who is the owner of the brand to the other distinct persons?

We will see in detail in the next segment where we'll deliberate this issue in detail in the food and beverage segments. Also about the loyalty programs, we'll talk about in detail in the next segment. Go to your system. So, as you all can see on the screen, the journey, the GST journey for the food and beverage sector has evolved significantly since its inception and has achieved stability only after October 2019. So, during the initial few months of the GST implementation, the GST rate on restaurant services was determined by whether the establishment in which restaurant services are being provided have air conditioning facility or not.

just like the service tax regime. However, over time the government has introduced changes to simplify the tax structure. The tax rate was later standardized with a 5% GST applied to most of the restaurants, while premium restaurants and hotels with declared tariff above 7500 are chargeable to tax at the rate of 18%.

Outdoor catering services also saw changes. Initially, They were taxed at 18%, however, to provide relief to businesses and make compliances simpler. The GST rate on outdoor catering was also standardized.

Currently, outdoor catering services are taxed at a reduced rate of 5% GST without input tax credit. So these adjustments have allowed the sector to stabilize despite the initial challenges posed by the evolving tax regime. So now that we have understood that typically GST is applicable at the rate of 5% on restaurant services or 18% if located at specified premises. It is important to understand the meaning of the term restaurant services.

So the term restaurant services has been defined in the rate notification for services and it has four major limbs to it. So first is there should be a supply of goods being food or drink or any other article for food. which is fit for human consumption.

So in simple words, if any article which is not in edible form is sold by a restaurant, it should not fall under the definition of restaurant service. Another very crucial aspect to this definition of restaurant service is that there should be some element of service involved in the supply of such goods. This means that simply providing food or drink is not enough.

There must be an element of service being associated with it. Third, the service can be provided either for consumption at the premises like dine-in facility or as a takeaway. So this includes, this even includes the room service and hotels and food delivered to your doorstep. Lastly, the definition is wide enough to cover a wide range of establishments, restaurants, eating joints, messes, canteens, etc. So this ensures that all the type of food service providers.

are brought under the GST regime, providing a comprehensive scope. So, in the pre-GST era, various case laws established that mere supply of food cannot be considered as a restaurant service. It is the additional element, such as serving the food, providing a pleasant ambience and offering some personal services that introduce the service component. However, on 6th October 2021, Circular 164 brought a shift in this perspective by including cloud kitchens under the restaurant services. So this is a departure from the earlier rulings as it acknowledges the cooking and delivery process as a part of the service even without traditional dine-in elements.

So now I'd like to request Rahul to discuss the practical challenges which are faced by the food and beverage sector. Over to you Rahul. So now, as we saw that the restaurant service has been very widely defined, which includes any article for human consumption will be deemed to be service, regardless of whether it is served in the restaurant or is a takeaway or a door delivery.

The issue emerges, fundamental issue emerges that what happens for a prepackaged goods which are supplied either in a restaurant premise or these are supplied. in a takeaway counter, let's say separately, where one can go and buy this commodity in a restaurant premise itself. So all the conditions of the restaurant service, which Shashti mentioned, are being fulfilled. The issue emerges as to what should be the classification.

Will it still qualify to be a restaurant service? Then the levy will be 5%, no ITC. If it classifies as goods, then those will be taxable at the respective HSN code's tax rate, and ITC will be eligible. So what happened for this, there was an advance ruling on this context.

Kundan Mishraan Bandar. There the advancing authority gave a principle that, or rather the fact pattern of the ruling was the sweets, namkeens and cold drinks were provided in restaurants as well as there was another floor where it was sold as over the counter to the customers. So the authority ruled accordingly that wherever these sweets, namkeens, cold drinks items are supplied to the customers in a restaurant. Even if as a takeaway from restaurant also, it could be built under the restaurant head to be 5% without ITC. When these are supplied from the counter on a different floor, where there is no nexus to the restaurant service or restaurant intake or outtake, they should be classified as standalone supply of goods, available at a GST rate individually, where ITC will also be available.

Number 2. The judgment came from Gujarat High Court in HRPL restaurants where they ruled that in context of ice cream, that when it was ordered and supplied along with cooked or prepared foods through the outlets, they would assume the same character of the composite supply. Because since even the packed ice cream is supplied in a restaurant, it should be taxed as per the restaurant service category as 5%. Because of the divergent rulings, one has to be very careful as to what should be the classification of these particular commodities. Let's take an example, for example, Domino's, Pizza Hut or any restaurants, it's very common that they are supplying this bottled cold drink as a prepackaged only.

Coke, Thumbs Up is supplied prepackaged to the end customer without serving in restaurants. When it is supplied in a restaurant to the customer, can one take a view since? it is being served, it qualifies as a goods for human consumption, it is as part of or by way of a service, it should classify to be restaurant service regardless of the individual classification for it. Why that is very important because cold drinks are classifiable at 28% plus 12% says approximately 40% tax JST rate, vis-a-vis if one has to tax at restaurant service will be 5%. So there's a huge difference between both classifications.

And hence, there is a huge potential of litigation on this area. One has to be very careful as to whether these, what is the intent of parties who are supplying here? What is the nature of outlet?

Because if a shop supplying these commodities vis-a-vis a restaurant supplying commodity would have a different treatment. And what is the element of service involved? Whether the heating process, whether any sort of a...

process is being undertaken by a restaurant before supplying these commodities to arrive at the conclusion. So here we are seeing divergent practices being adopted even by the authorities while issuing notices. Some are treating as supply of goods, some are treating as supply of restaurant services.

This issue is something where one has to evaluate all the appropriate factors and take a view on individual case to case basis. And also accordingly, maintain adequate documentation to substantiate before authorities. Moving on to the another issue with this GST on trademark users.

This issue has recently seen in the media limelight especially so this is something which was issue already being there for the other sectors in real estate and others we have seen this already. What happens the authorities are taking a view that since there's a deeming fiction under GST legislation that any supply which is from the head office to the branch office, which are considered to be a distinct person for each other, are deemed to be a supply from one to another. And when the recipient is not able to take full input tax credit, then it has to be at open market value. In the restaurant context, since the ITC is not available, the authorities have been alleging that the brand is owned by the head office. Since all the documentation IP is having the address of head office, the branch office is using this.

logos or the brand for their outlets and supply and there should be a cross charge happening from head office to the state branch offices and GSE should be discharged on that. particular issue brings a lot of aspects as to a lot of open questions whether trademark is registered in a particular state or whether this is registered for a company as a whole which should be should be appreciated by the authorities which has not been taken as a ground in the litigation or authorities have been just clearly only on the schedule one this issue has been particularly highlighted also there is no concept of a distinct person in the trademarks the distinct portion of demification is only coming in GST Act. When the Trademark Act is giving a copyright or a trademark for the entire company as a whole, how can one can attribute that this is being supplied from one state to another state? So this issue, GST Council should take adequate representation on this and bring clarity before this issue goes in multiple forums to get clarity upon.

clarity would go a long way to resolve this issue at the ground level stage itself. Moving on to another issue, which is very interesting in this sector, what happens, there are central kitchens and there are dark kitchens. Central kitchens are the premises where there is an adequate infrastructure being installed.

A lot of capital goods, equipments are installed in the central kitchen. The multi-state outneries or multi-state restaurants have the central kitchen. in few big states and they have dark kitchens in across various cities and states. What Centre Kitchen does is Centre Kitchen procures the raw materials, there is enough infrastructure, enough personnel deployed there, they will do the entire cooking process and almost the finished goods are being supplied to dark kitchen. This could be semi-cooked food which requires some further process.

So dark kitchen what they'll do is dark kitchen will receive the commodities. and dark kitchen will apply some reheating process, mixing process, there are some application and then as and when the order comes, dark kitchen supply to the end customer. There's no doubt that the supply from dark kitchen to the end customer is a restaurant service which should be at 5%.

Be it cloud kitchen, be it a restaurant dining service, it should be at 5% category is what clarified by the government. The principal question emerges, what happens to the supply between the center kitchen and the dark kitchen? If those are in same states, there is no supply between the same registration, that's clear.

But the large question emerges when these are in a different state. Then what happens? The center kitchen cannot take generally the ITC on the procurements of raw materials. And if it is treated as a restaurant service from center kitchen to dark kitchen, they have to charge 5% to the dark kitchen. And dark kitchen again can't take input off.

And then when they're supplying, they're again charging 5%. So there's a dual levy of 5% on the same food, just because one state is being cooking and doing the entire process and another state is supplying to the end customer. Is it something deliberated or there's a lack of clarity on this particular aspect?

The technical issue or the fundamental issue emerges here is what is the classification of this supply between central kitchen and dark kitchen? Is it a restaurant service or... is it a supply of individual goods in a semi-cooked form to the dark kitchen?

Because in large times what happens is these are the semi-cooked foods which cannot be consumed in its current form. So applying the test of the article of human consumption in the definition of restaurant service, one may evaluate a view that these do not qualify to be restaurant service and should be treated as an individual supply transaction. The moment my output supply classifies to be a goods in nature, automatically on the inward side, the IT should be eligible. So multi-state restaurant chain are someone who are facing this issue. Even if this view is something which is adopted, another practical challenge is being there to identify how much raw material is getting consumed for the interstate supply to the customers and how much.

raw materials are being consumed for the supply to dark kitchens is also a practical challenge. And hence, the restaurant chains who are operating in multi-state sectors should evaluate appropriate structure to avoid this particular GST leakage of 5% in 5% rule. Moving on, another interesting aspect is, I think we all would have experienced this, when we go to a restaurant, we get a payment discount. The bill comes to us.

Let's take an example, the bill came to us for 1200 rupees, the GST increased 5%. The total amount in the invoice is 1260. When we are making the payment, we go to Dynout, Gold, etc., multiple payment apps. and we get a payment discount of 25% itself.

So bill amount in this example 1260, I get a discount of 25%. I am ending up paying 75% of the bill amount to the restaurant. There are multiple models in which this discount amount is being born.

In some cases, the application owner is bearing this amount to promote the application. In some cases, it has been split between restaurant and the application owner. But in large cases, what we have seen that this particular discounts are being borne by the restaurant itself. So these are nothing but a discount which the restaurant would have given to the end customer. If these are own inverse discount, section 15 clearly allows me to take a benefit of adjustment of a discount on this particular supply.

Practically what we are seeing here, there's a challenge of disclosing own inverse discount because the discount is linked to the total. amount of invoice but one has to take a proper call and evaluate a situation whether what should be the alternate ways in which the GST adjustment can be claimed on this discount being offered because here the amount received by the restaurant is quite lower as compared to the GST amount only GST is quite high. Moving on to the another interesting issue where DGGI has been very active on this issue and we have seen to lot of bakeries DGGI has issued notices.

There are multiple scenarios here one can see. There are bakeries which does not have any serving facility, there are bakeries who have serving facility and there are bakeries who produces cakes only on the pre-order and there are bakeries who have the cakes available. You can go and buy the cake just like any other goods.

You go to bakery, you buy a cake and you come. For the bakery, if we see the definition of restaurant service, it was very widely defined. Any article for human consumption, whether door delivery or supplied as a takeaway, was also qualifying to be as a restaurant service. Cakes, bakery items also qualifies to be a food or article for human consumption.

So can one take a view that it's a restaurant service itself and should be at a 5% without ITC or because because In few of the scenarios, the bakery are keeping the standard cake available at their outlet. One can just come and take the cake and go. It should be qualifying to be over the counter sale of cakes and desserts and should be qualifying at the respective HSM classification and classifying at the 18% rate.

On this, what we are seeing is the authorities have not been distinguishing the each and every character. The standoff authorities have been that this entire supply of cakes, desserts and all should be at 18% rate as individual standalone supply of goods and should not be a restaurant service. But one should really evaluate and see the underlying facts of the case because applying the judgment of the Madras High Court as we saw in the beginning, the principle coming out from the court says if there's a serving facility being available, the outlet becomes a particular restaurant service.

It qualifies to be a restaurant service which is other than specified premise or within the specified premises depending upon the rate character. So since the subject message is being available, one has to give an adequate weightage to the particular factor and take an appropriate call accordingly. There cannot be a standard rate applicable to the cake or these commodities straight away.

We have to go deeper into the relevant fact of the case and then accordingly determine the classification. The next issue is on packaging charges on the e-commerce operator supplies. As we know that the restaurant service is something which is notified under section 9.5 on which if a restaurant is supplying restaurant service through an e-commerce operator, the e-commerce operator has to pay GST under, we call it reverse charge practically. Let's take an example. There is an invoice on which...

The restaurant is charging restaurant service or the food amount is 500. The packaging charge is some percentage of the food amount which is levied by the restaurant. And then there's a total amount on which GST is being charged. The classification of the packaging charge is not under dispute because that qualifies to be composite supply and hence should be the same character of the principal supply. But the main issue emerges if we go to the definition of section 9.5 and also the notification where the specified categories of services are being notified for the e-commerce operator to pay GST.

they only specify the supply of restaurant service do not specify that supply of restaurant service and all other NC supplies which are supplied by the restaurant along with this hence because of this particular literal interpretation in the notification entry we are seeing practically there has been divergent practice being involved being adopted by multiple players what happens if the ECO is discharging taxes on the restaurant service and the other charges which the restaurant is operating those are being disbursed to the restaurant they are withholding the issue is withholding tcs one percent on these additional charges and the liability levy is being shifted commercially on the restaurant to pay gst on so here when i should be very careful and evaluate the appropriate position because nine five clearly says that the law will be applicable to the e-commerce operator as if he is a supplier liable to pay tax. Would that mean that all the other law that composite, mix supply, the classification, everything will be as applicable to the supplier would be applicable to the e-commerce operator also. Moving on, another issue which is very practical is the service charges on alcohol supply.

What we see there are restaurants who are supplying alcohol as well as food. alcohol is out of levy of GST, VAT is applicable on that. But what happens is service charge is collected as a percentage of the total invoice amount. So service charge is there on the food will also, there's a food, there's no alcohol value also. There's no doubt that there should be no GST on the alcohol value.

There should be VAT being charged. But the issue emerges is what should be the treatment, what should one charge on the service charge on the... element of alcohol value.

In this example, on the 1000 rupees, the 10% service charge, 100 rupees, what should be the treatment, whether it should be liable to GST, whether it should be liable to VAT. There are two major views coming on this particular issue, which we have seen practically adopted. One, that it should be proportionately attributed.

The amount attributable to alcohol should be clubbed with the alcohol and VAT should be levied on that amount. And second is that this because the GST implementation has abolished the entire framework on all GST, all goods and services supply GST has to be applicable. And hence, even on service charge, since it qualifies to be a service, should be levied to a GST and not VAT.

So on this also, what we are seeing practically, there is pretty much being followed across the industry for levying food. and alcohol bill separately and the alcohol bill on service charge one has to take up appropriate call before the this is something which is being written by the authorities. Moving on to another issues we'll move on to next one.

So the other final issues under GST on food sector is stock transfer from of kitchen equipment. or other assets from one state to another. Again, we spoke about that any supply from one state to another state qualifies to be a deemed supply between distinct persons, should be available to GST. So what happens if one state procures kitchen equipment and they are supplying those kitchen equipment after uses, after let's say one, two years down the line to the another state of the same legal entity? On the inward side, they are not available ITC because of the restaurant service restriction of 5%.

On the outward side, one has to charge GST because this qualifies to be supply of goods between one state to another state. And another state also, the recipient state can't take input of because, again, this will be used for the restaurant supply. And 5% is, again, conditional. Then no ITC is available. So, essentially, this stock transfer of used equipment from one state to another state is...

creating a GST leakage of dual time levy on the one supply and creating a loss in the hands of the restaurant sector. And similar to motor vehicles, the government has been proactive in identifying the particular issue and they have given a margin scheme for motor vehicles. And there's a scheme for second-hand dealer of used commodity, whether that can be applied for a restaurant, whether the restaurant can be considered to be a second-hand dealer.

for this supply of equipment is something which is to be evaluated. Another issue is when this all-inclusive packages are being offered by a restaurant which includes entertainment events, food, drinks, music and there's a composite package amount being charged. Again here the issue is whether it's a composite supply, mixed supply or the standalone supply because here the individual supplies are taxable at different individual rates. This issue was predominantly relevant till September 30, 2021 because till that time the entertainment activities were under 28% levy. Afterwards the levy has been shifted and the levy became 28 to 18 percent because most of these services are qualifying even if as a bundle or a mix supply at 18 percent so this issue is something which has been resolved by way of a rate reduction on the entertainment services another issue comes as we saw in the hotel segment that if a hotel is supplying breakfast as complementary along with the tariff qualifies to be composite supply and hence the rate of hotel should be applied on the entire bundle that means 12 rate is being applied or 18 is applied and there is no condition of the itc restriction and hence whether the restaurant in a hotel can avail the proportionate credit on the raw materials and services being used for the food which is being consumed in the complimentary breakfast given to the customer or the meals which are being supplied as packages for accommodation.

Technically, we don't foresee any issue, it should be eligible, but there are practical challenges faced by the restaurant as to how to identify this particular value on which they can take ITC. Another issue comes is how to treat the bundle supply of cake and food together by a, let's say, cake outlet to the customer. What we are seeing as we highlighted that DJGI has been taking a uniform view that supply of cakes are a supply of goods taxable at 18% rate and these are not getting the benefit or the treatment of restaurant service at 5%. So once these are supplied as an add-on along with the food to the customer, what should the treatment is something on which the client is awaited. And the fundamental issue which the industry has always been grappling with is the wastage.

How should that be treated? Because we saw that a restaurant who is in a hotel premise having a higher declared tariff, they are eligible to take ITC. In a restaurant sector, what happens is there is always a wastage of food which is expired or produced but not sold.

What happens? Do they need to do a reversal under 17.5H? Or can they take a view that these wastages are something which are normal in nature and should not warrant any reversal? So again here... In our view, the normal wastage should not be warranted an ITC reversal.

Only for the abnormal wastage, one has to look into detail what is the reason of this particular wastage and then evaluate the requirement of reversal of ITC. Now we will move on to the third and the most emerging sector, which is co-living. Let us see the legal framework, how this has evolved over the time for the co-living sector. So, from the advent of GST, the co-living sector has been one to keep an eye on. While the law was very simpler when it was initially introduced with just a few entries determining the taxability for the entire sector, an entry for exempting the renting of a residential dwelling and an entry to levy GST on the accommodation services, the tariff exceeded Rs. 1,000 per day.

Most players in the co-living sector did not worry about GST then as there was no GST on the rent paid to the landlord and again no GST on the rent charged to the end customer considering the entire thing to be as renting of residential dwelling. However, the entire framework changed on July 18, 2022 when the renting of residential dwelling was brought under the purview of reverse charge. So, this threw the cat among the pigeons.

So, This was a huge hit to the players in the co-living sector. As we all know, the co-living sector follows a comp pricing, comp tax pricing, which means that the price to the end customer is fixed. Now, since the price is fixed, but when the property is taken on rent from the landlord, the company is required to pay GST under reverse charge.

Additionally, given that the output supply was not levyable to GST, this RCM paid becomes a cost to the company. So this threatened the players to even they evaluated to exit the industry and creating a blockage for the new entrants in the industry. So this is when certain new models were developed in the industry, which we will be discussing in a few minutes.

But before we delve deep into that, there was another change that was brought in recently on July 15, 2024. So however, this time the intent of this change was to bring more clarity as to what is renting and what is accommodation. So during the two year period between July 18, 2022 and July 15, 2020. There were a few rulings which deemed that hostel services are akin to renting of residential dwelling. So to put an end to such interpretations, the exemption for renting of residential dwelling was modified to clearly exclude the accommodation service from the purview of residential dwelling.

So services such as hostels, PGs and other related services were deemed to be accommodation and not residential. Thank you. Additionally, any accommodation services provided having value of less than Rs. 20,000 per month per person and supplied for a continuous period of 90 days was exempted from the levy of GST. But just like most of the other clarifications on the GST, rather than providing a complete clarity, this new change also led to more questions which I would like to request Rahul to throw a light upon. As we saw that there has been recent amendment in this entry which they have introduced entry number 12A which says that there is a new exemption if with the dual condition that the accommodation charges should be up to 20,000 per person per month and there is a condition that it should be for a minimum continuous period of 90 days.

Now let us look at that this particular entry what areas or what challenges the centre is creating for the co-living players. When the builder owners or the landowners have opted for this exemption, would they be required to discharge GST on the entire deposit collected when the tenants vacate the premise within 90 days? What we are seeing practically that on ground generally in this industry, the locking period is of one month and you collect...

the fee there is always an intent of long-term stay but in this lock-in of one month there could be a scenario where the tenant exits the premise within the period of 90 days so can one take a view or can the authorities say that you have to pay gst on that prima facie yes because the strict condition of the entry that it should be for a continuous period of 90 days is getting broken and hence one may have to pay gst on that but it is possible to mitigate the risk basis certain safeguards which someone can build in the contract and hence this aspect should be looked at on a case-to-case basis another issue this entry pause is can the limit of 20 000 per month be levied for each bed rented out or it should be seen as a room as a whole because the entry nowhere specify that it could be for a bed or per room as such, they're only saying it should be per person per month. So the most common view emerges from this entry is as long as let's say you are renting out two different persons, a single room on a bed basis, you will have to apply this entries exemption for individual person level and you need not to categorize at a room level. Another issue which is there in this is let's say one person takes the room for three months and the rent is 20,000 per month below only but in totality so it exists 20,000 for example let's say a corporate customer who taken three individual rooms in a hostel or a PG now do you have to look at this term per person for each room or for each accommodation service as a whole provided to a person. If we interpret that the person must be for the entire accommodation service provided, what if the company has rented out two rooms in two different buildings to the same person, then one can't take a view that it has to be per person the amount is exceeding 20,000 rupees. Therefore, there's no clear answer to this question.

We might have to wait for the judicial precedent or any clarification on this particular aspect. But in our view, if contractual agreements with one person is on an individual basis, one may have... can take a view or evaluate a view that should be done on a person plus unit level together. Here one can also draw a reference from a RWA circular.

That circular clearly clarifies that this exemption for RWA to a tenant is for per person or per unit owner. But they have told if a unit owner has more than one flat in an apartment and he is paying maintenance charges for two apartments together. then it has to be seen at a unit level as well as at the parcel level.

So the exemptions will still be available if for the per flat this is below the limit. So one may draw an inference from that particular clarification also in this context to evaluate what should be the appropriate view. Another important question emerges is that does this rate of Rs. 20,000 per month refer only to the rate of renting of bed or it is all-inclusive prices which could include renting of bad food, other amenities, maintenance given to this tenants or students. Generally, what we see that the industry follow a practice of all strategies, but on the invoice, the breakup is being given that what component is towards the rental, what component is towards the other amenity charges.

When such a practice is followed, one can possibly contain that the rate per month should only be for the accommodation service. and it should not include the other amenity charges. The other service can still be classified as the individual rates applicable. Further, one should also look at whether this supply would qualify to be a composite supply or a mixed supply or a standalone supply in the particular industry. Food and maintenance might be mandatory to be opted for accommodation in few sectors like hostels.

but it might not be a mandatory condition in a co-living sector where working class is being seen. Therefore, this aspect again needs to be analyzed on a case-to-case basis to have an appropriate view for a position being taken. Another last but not the least issue comes that what happens when a supplier of accommodation service charges GST from the beginning of the rental period but the tenant stays more than 90 days.

in a particular hostel or a PG. Then technically the supplier is eligible for this 2LA exemption given above because this rental is less than the threshold limit plus the stay also is a continuous period of 90 days. Initially at the time of entering the contract the parties were not aware for some reasons that the stay will go more than 90 days and GST has been charged by the supplier and the GST be claimed as a refund.

from the government is a question. One can legally challenge that it would be eligible, but practically one may face a problem in claiming the refund of those GST being paid. And hence one has to be very careful in maintaining the documents and contracts in such a way to avoid such situation as much as possible and if the refund situation arises, the document should also support the view and accordingly refund can be claimed.

Now let's move on to the typical models which are being adopted in this industry and what are the typical issues in these models which industry players faces. One of the most popular model is the platform model. What happens in the platform model is the owner of the property, they list their particular units on the e-commerce marketplace platform to generate the leads and find a particular tenant on the platform.

Once the property is identified and selected, the particular owner enters into a lease agreement with the tenant directly. While the marketplace may facilitate this arrangement, but essentially the rental agreement happens between the owner and the tenant directly. So considering that owner is providing this accommodation service or you call it a rental of residential dwelling services to the tenant directly, whether he's qualifying or whether it is eligible to claim the exemption under either entry number 12 or 12A.

Now since these, if these are paying gas or hostel accommodation, entry number 12 has clearly excluding those scenarios because of the explanation being inserted effective from July 2024 that this will not classify under the renting of residential dwelling. Rather, one can take an exemption in the another entry which is inserted recently. subject to the dual conditions of the threshold limit and the continuous period stay is being fulfilled. And what happens in this model is the platform is providing the amenity or other maintenance charges to the customer directly.

And one would say that even these maintenance charges are ensured to the accommodation service and hence even the platform should be eligible for the exemption 112A separately or this cannot be equated with the accommodation service because there are two different suppliers here. So, that's the problem. This issue is something which is again not yet tested before the authorities.

We are seeing some level of litigations at the GST audit level. Authorities have been picking up, but this model will require a watertight documentation to support the kind of services being provided and the classification what one can adopt. Now moving on to the another model, which is again predominant in the industry is leasing lease out model. What happens here, there are let's say two companies, PropCo is the owner of the particular building or a premise, OpCo is the entity who is giving it on rental to the customer. So OpCo takes essentially on main lease from PropCo and operating companies further leasing out sub leasing to the customer.

In that case, the first and the foremost issue emerges is that whether the operating company who is taking the residential dwelling on rental from the propco is required to pay GST under reverse charge or not. Let's assume that the operating company on the outward side are eligible to claim the exemption and hence they are the service provider who are exclusively providing exempt services hence not required to take a decision under section 23 and so they are the unregistered person. whether the operating company will be required to take registration only for the purpose of paying this GST and the reverse charge on the taking the renting of property from PropCo or one can take a view that the exemption notification or the RC notification is referring that recipient has to be registered person at the first place to even follow the entry of reverse charge and hence since the recipient here operating company is not liable to take a registration because the output supply is exempt and hence even the RCMNT is not applicable at the first place.

The issue becomes more relevant in the case where operating company let's say there are few rooms which they are supplying which are not classifying under the exemption of 20,000 per unit per person. Let's say there are few rooms they are supplying to customers which are above this threshold so they are not providing exclusively exempt supply and required to take registration. When the operating company registered, whether they will be required to pay a reverse charge on the rental of the entire property, I think it will be very difficult to say no, because they are registered person and the RCM entry will be squarely applicable on the operating company.

But the real issue or the logical issue emerges, let's say operating company is 100 rooms, but out of 100 rooms, only one room is exceeding the threshold because of that they are required to take registration. Because of one room is... crossing the threshold, they will have to pay reverse charge on the entire inward leasing of the property, which would again lead to the additional cost in the hands of operating company because they will not be required or be eligible to take the proportionate credit.

And hence, the particular GST will become a cost in the supply chain to the end customer, which may not be the intent of the legislation of providing this exemption entry because the entry was the preamble to the GST Council meeting clearly said that They intend to give relief to the working professionals and the students and hence this particular exemption is being provided when this is qualifying to be the dual condition criteria has been fulfilled. One has to wait and watch and lobby before the government that this issue is something which they clarify that when on the outward side there is exemption being availed, on the inward side also the proportion exemption should be eligible to be given to the operators. to avoid this GST button on the working class professionals. With this, before we wrap up, I think if there's any questions on the chat window. Yeah, I don't think there are any major questions.

There were a few questions which we have replied on the chat itself. So we are good to wrap up. Before we wrap up, I just want to take this moment to thank all of you.

Thanks the entire. X-Men team and all the participants who have joined. I hope you would have found this session valuable and this can navigate.

the complexity under GST with greater clarity and confidence. Feel free to reach out to us if you have any other questions and audience who are seeing this in other platforms not Zoom. Feel free to reach out to us on the contact details given. We'll be happy to clarify any questions which you have.

Once again, thank you for the participation. Have a great day ahead. Over to you, Shiva.

Thank you CA Rahul Bansari for enriching our understanding with your insightful presentation. We greatly appreciate your effort in making this session a success. We would also like to thank all participants for their time and cooperation.

Your engagement is invaluable to us. While we endeavour to address all queries during the session, please do not hesitate to send any additional questions or feedback to connect at the rate taxman dot com. Thank you once again.

We look forward to discussing another important topic with you very soon. Until then, take care and have a wonderful evening. Thank you.

Thank you.

Transcript for:GST Challenges in Hospitality Sector Webinar

Transcript for:
GST Challenges in Hospitality Sector Webinar