ITC Restrictions for Restaurant Services at 5%
Concessional Tax Rate: No ITC on General Expenses, Area Apportionment, and Rules
42/43
By Yogesh Verma (CS/ LLB) / 2 min. read / GST Advance Ruling
Name of Applicant: Mangaldas Mehta & Company Ltd
Name of Authority: Gujarat Authority for Advance Ruling (GST)
Date of Ruling: 03.02.2024
Advance Ruling No.: GUJ/GAAR/R/2024/05
Summary of
Ruling: The applicant,
Mangaldas Mehta & Company Ltd., operates a boutique hotel, restaurant, and
other facilities in a heritage property located in Ahmedabad, Gujarat. The
property has been declared a heritage property, and the hotel and restaurant
are run within the same premises. The declared tariff for the hotel rooms
throughout the year is below ₹7,499 per day, and they charge 5% GST on
restaurant services. Due to the specific tax provisions, they do not avail any
Input Tax Credit (ITC) on the restaurant services.
Key Facts of Advance Ruling:
1. Applicant Details: The applicant runs a boutique hotel with
rooms, a restaurant, a banquet, a kids’ play area, and other associated
services. Their GST number: 24AAACM4217C1ZS. The restaurant and hotel are situated
in the same building, which is a declared heritage property. The declared
tariff for hotel rooms across all seasons does not exceed ₹7,499.
2. Operational Structure: The premises include the hotel rooms, a
restaurant (Agashiye), a kids' play area (Gammat), a banquet (Dev Viman), and
other facilities. The applicant's restaurant services are charged at 5% GST as
mandated for restaurants where the declared tariff of rooms is below ₹7,500.
Question Before Authority:
The applicant presented the following key
issues for clarification:
1. Whether the applicant is entitled to claim ITC
on expenses incurred for general upkeep and business-related expenses of the
heritage property.
2. Whether the applicant can claim ITC based on
the square footage or area of usage of the premises rather than on a turnover
basis.
3. Whether Rule 42 and Rule 43 of the CGST Rules
(regarding apportionment of ITC between exempt and taxable supplies) are
applicable when the declared tariff for hotel rooms never exceeds ₹7,499.
Submission by Applicant:
1. Huge Business Expenses: The applicant argued that since they have to
incur substantial costs for maintaining and upkeeping the heritage property
(electrical repairs, housekeeping, etc.), they should be allowed to claim ITC
on these expenses. They explained that these expenses are capitalized, and
although they don’t claim ITC on restaurant services due to the 5% GST rule,
they should be allowed to claim ITC on general expenses related to the
property’s maintenance.
2. Capital Goods and General Expenses: The applicant further stated that their
expenses include running costs such as maintenance, repair of electrical goods,
housekeeping, etc., which are not directly linked to the restaurant service but
to the overall upkeep of the heritage property. They argued that such expenses
are for business purposes and should not be restricted by the prohibition under
Section 17 of the CGST Act or Rule 42/43.
3. Apportionment Based on Area: The applicant proposed that instead of
apportioning ITC based on turnover (as stipulated in Rules 42 and 43), they
should be allowed to apportion ITC based on square footage or area of usage. They
argued that this would provide a more accurate reflection of ITC utilization
since the expenses are incurred for the overall heritage property, which houses
multiple business units (restaurant, hotel, banquet, etc.).
Relevant Section of this Ruling:
1. Section 16 of the CGST Act, 2017: This section provides the basic eligibility
conditions for availing of ITC on inputs and input services used in the course
of business.
2. Section 17 of the CGST Act, 2017: This section specifies the cases where ITC is
blocked or apportioned for supplies that are partly used for taxable and partly
for exempt supplies.
3. Rule 42 & Rule 43 of CGST Rules: These rules deal with the apportionment of
ITC when inputs or input services are used for both exempt and taxable
supplies.
4. Notification No. 11/2017-CT (Rate): The notification provides that the 5% GST
rate on restaurant services can only be availed if no ITC is claimed on inputs
and input services used in providing such services.
Discussion and Findings by the Authority:
1. Restaurant Service GST Rate:
The
5% GST rate for restaurant services is allowed only on the condition that no
ITC is claimed on inputs or input services used in providing restaurant
services.
The applicant’s
restaurant services fall under this category since their declared tariff is
below ₹7,500, and they charge 5% GST on restaurant services. Therefore, they
are not eligible to claim ITC for any expenses related to restaurant
operations.
2. Non-Applicability of Section 17 and Rules
42/43:
The
applicant argued that Section 17 (which deals with the restriction of ITC) does
not apply since they are not involved in any exempt supplies. They also claimed
that the rules on apportionment (Rules 42/43) are not applicable in their case.
However, the authority
clarified that Section 17 and Rules 42/43 come into play when inputs are used
for both taxable and exempt supplies. Since the 5% GST rate is availed by the
applicant, there is a blanket prohibition on ITC related to restaurant services
under the GST rate notification itself. Therefore, the issue of apportionment
does not arise, and Section 17(5) is also not applicable.
3. Apportionment Based on Square Footage:
The
applicant proposed that the ITC be apportioned based on the square footage or
area of usage of the premises. They argued that this method would more
accurately reflect the usage of inputs across different business activities
(restaurant, hotel, banquet).
However,
the authority rejected this proposal, stating that apportionment based on
square footage is not permissible under the current GST framework. The law
requires apportionment to be based on turnover, as outlined in Rule 42/43, and
even then, ITC is not allowed for restaurant services at the 5% GST rate.
Final Ruling:
1. ITC on General Expenses: The applicant is not entitled to claim ITC on
expenses incurred for general upkeep, maintenance, or capital expenses related
to the heritage property. This is because they have opted for the 5% GST rate
on restaurant services, which prohibits the claiming of ITC on goods or
services used in providing such services.
2. Apportionment of ITC Based on Area: The applicant cannot apportion ITC based on
the square footage or area of the premises. The law requires ITC apportionment
based on turnover, but in this case, since ITC is entirely blocked for
restaurant services, no apportionment is allowed.
3. Applicability of Rules 42/43: Rules 42 and 43 are not applicable in this
case since the applicant is prohibited from claiming ITC on restaurant services
altogether due to the 5% concessional GST rate.
Disclaimer: All the
Information is based on the notification, circular and order issued by the
Govt. authority and judgement delivered by the court or the
authority information is strictly for educational purposes and on the
basis of our best understanding of laws & not binding on anyone.
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