Goods and Services Tax (GST) is now a reality in India from July 1, 2017. As anticipated, the impact of GST has been nothing less than transformational, impacting each aspect of business and operations at the transaction level. Within the service sector, GST has pushed businesses to reimagine their business models, commercial relationships, costing, compliances, supply chain and processes. The hospitality sector which includes hotel accommodation, events, restaurants, transportation is an integral part of the tourism industry. The impact of GST on the hospitality sector is far-reaching and many special provisions have been incorporated in the legal provisions. The aspects to be closely examined from GST perspective are registrations, tax rates, place of supply, reverse charge taxation, tax credits and returns.
Under the erstwhile indirect tax regime, the service sector was primarily subject to service tax besides state level taxes such as luxury tax, entertainment tax, etc. The most important change for the service industry is that from the erstwhile facility of a single centralised registration across India, each state where operations are located needs to be separately registered and is deemed to be a separate taxable person. Maintenance of records, tax computation and credits, filing of returns need to be undertaken separately. This has resulted in increase in compliance burden and the service industry has been incessantly demanding the facility of centralised registration from the government.
India has chosen the dual-level GST where the tax is levelled concurrently and simultaneously by the central and the state Governments. GST is a destination based consumption tax i.e. tax is paid to the government where the service is consumed and such destination or place of consumption is known as the ‘place of supply’. It is very crucial to determine the ‘place of supply’ correctly as any lapse in the same may lead to wrong kind of tax to be paid. Whether a transaction is an intra-state supply, inter-state supply, export or import depends on the correct determination of the place of supply. Generally, the place of supply is the same as the location of the recipient of service. However, the same is not without exceptions. Many services in the hospitality sector such as hotel, travel, events have special provisions to determine the place of supply. For example, for hotel accommodation, the place of supply is the location of the hotel and not where the recipient is located. For services by way of admission to events, it is the location where the event is held. For passenger transportation, it is dependent on whether the recipient is registered or not. If the recipient is registered, then the place of supply is location of the registered person and if unregistered, it is the place where the passenger embarks on the journey. For services consumed on board a conveyance, it is the place of the first scheduled point of departure. In case either of the customer or supplier of hospitality service is located outside India and the other in India, then there are separate set of provisions for determining the place of supply. This is important to ascertain whether the service rendered qualifies as export or import.
The place of supply is also critical from the point of view of input tax credit (ITC) which the customer would be entitled to. It is very important for a business in the hospitality sector to know exactly whether the customer is registered or not and where the place of supply would be so that appropriate care can be taken to pass on the ITC. Non adherence to procedures can prove to be adverse for customer relationships.
The rate of tax on services too has seen an upward movement under GST. Against a standard tax rate of 15% under service tax, the rate has moved up to 18% and in some cases to 28%. This is particularly interesting for the hotel accommodation industry where the rates are given below –
It should be noted that ‘declared tariff’ includes “charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.” Accordingly, even if the accommodation is booked for an effective price below INR 7,500 after discount where the original tariff was INR 7,500 or more, a higher rate of 28% rate could be applicable.
Many other aspects such as correctly availing ITC and ensuring that vendors are compliant with GST are important. Reverse charge taxation where the received is made liable to GST instead of the supplier is required to be tracked. Monthly returns in form GSTR-1, 2 and 3 should be furnished within due dates.
In a nutshell, it can be said that despite the initial hiccups and negative impact in certain areas, GST should be considered as an opportunity for the hospitality industry. Many taxes on procurements that were earlier a cost such as VAT are now eliminated and tax cascading is at a minimal. Further, GST is helping bring in transparency and clarity in tax aspects. The quicker the hospitality industry adapts to GST, the higher the possibility to be compliant, avoiding interest and penalty pitfalls and maintain smooth vendor and customer relationships.
By Jigar Doshi, Partner & Executive Director – Indirect Tax, SKP Business Consulting LLP