Query:
Can restaurants avail input tax credit (‘ITC’) if they charge GST at the rate of 12% (Non – AC) 18% (AC) instead 5% on the sales made by them?
Service tax regime:
In earlier tax regime abatement of 70% was given on service tax levied on restaurant services by amending the notification No. 1/ 2006-ST, dated 01/03/2006 vide notification No. 34/2011-ST dated 25/04/2011. Therefore, rate of service tax was 4.5% instead of full rate of 15%. The abatement was available provided no Cenvat credit is availed either of inputs or inputs services. This abatement was only optional and not mandatory. Therefore, restaurants were eligible to ITC if restaurants charges full rate of tax (i.e 15%).
Analysis:
GST council on its 23rd meeting in Guwahati, had slashed the tax rate to 5% on the condition that restaurants will not be able to take the benefit of ITC. Finance minister Mr. Arun Jaitley commented on this issue in the press conference that “Since they did not pass on the ITC benefit to customers, they will not be eligible for the benefit themselves”.
In GST regime, rate of tax is fixed based on HSN / Service Accounting code (‘SAC’) code. Tax payer has to collect the GST as per the rate mentioned for particular HSN/SAC code. Tax payer can opt to charge higher rate wherever more than one rate is mentioned for particular HSN/SAC code (example GTA service). SAC for restaurant service is 9963 and rate of GST mentioned for the said SAC is 5%.
As per section 11(1) of CGST Act, 2017 “Where the government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon………….”
As per section 16(1) of CGST Act, 2017 “Every registered person shall, subject to such conditions and restrictions as may be prescribed and …………….. be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and ………………………………………”
On combined reading of the provisions of both the above section, it is understood that, central government has the power to exempt absolutely or subject to such conditions any goods or services. And also, it has the power to restrict absolutely or on such conditions any input tax charged on supply of goods or services used for furtherance of business.
Conclusion:
Based on above analysis, we can conclude that, rate of tax for restaurant service is 5% (mandatory) and benefit of ITC not available for restaurants.