1 IMPACT OF GST ON HOSPITALITY INDUSTRY By

1 IMPACT OF GST ON HOSPITALITY INDUSTRY By : CA Varun Khandelwal Partner M/s Khandelwal Sharma & Co, CA k. cavarun@gmail. com Khandelwal Sharma & Co, Chartered Accountants

2 Khandelwal Sharma & Co, Chartered Accountants Hospitality industry is a versatile field encompassing accommodation and entertainment services, accounting, food and beverage, event management and above all, guest satisfaction.

3 Khandelwal Sharma & Co, Chartered Accountants Impact Analysis Of GST On Indian Hospitality Industry i. Hotel Sector is always on priority by Govt and as such tax reliefs in form of abatement / exemptions is provided to them under notification 26/2012 -ST and 25/2012 -ST ii. Hotel Industry including tourism contributes 6. 23% of national GDP and 8. 78% of total employment in the country. iii. This industry definitely help in building the nation and is going beyond the borders.

4 Khandelwal Sharma & Co, Chartered Accountants Present Applicability of Taxes on Hospitality Taxes imposed by states currently VAT (Varies from 5 to 20% depending on the act of the state Luxury Tax (Generally depends on the room tariff and the state [generally varies from Nil to 12%) Taxes Imposed by Centre Currently Service Tax 1. Varies on the type of service eg. Catering, Restaurant, Accommodation etc. 2. Hotel Accommodation (Abatement @ 40%) s. t. Notification 26/2012 and 25/2012 3. Restaurant (Service Portion is 40%) 4. Catering (Service Portion is 60%) 5. Central Tax is levied despite of the state taxes. 6. Renting of Banquets etc (Abatement of 30%)

5 Khandelwal Sharma & Co, Chartered Accountants Present Applicability of Taxes on Hospitality • Combine VAT + Service Tax + Luxury Tax , the levy would range between 20% to 27 %. • Cascading effect due to non set off of Central Tax against State Tax or vice versa. • Present Service Tax Rate is 14% + 0. 5% = 15 %. i. Cenvat Credit of Service Tax is available ii. Cenvat Credit of SBC = Not Available iii. Cenvat Credit of KKC = Available

6 Khandelwal Sharma & Co, Chartered Accountants Rates on Hospitality approved by council Sector Description of Service as Rate with ITC Supply of Food/drinks in restaurant not having facility of air- 12 % conditioning or central heating at any time during the year and not Full ITC having licence to serve liquor. Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having room tariff Rs. 1000 and above but less than Rs. 2500 per room per day 12% Full ITC Supply of Food/drinks in restaurant having licence to serve liquor 18% ITC Full Supply of Food/drinks in restaurant having facility of air-conditioning or central heating at any time during the year 18% ITC Full Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes where room tariff of Rs 2500/ and above but less than Rs 5000/- per room per day 18% ITC Full

7 Khandelwal Sharma & Co, Chartered Accountants Rates on Hospitality approved by council Sector as Description of Service Rate with ITC Supply of Food/drinks in air-conditioned restaurant in 5 -star or above rated Hotel 28% Full ITC Supply of Food/drinks in outdoor catering 18% ITC Full Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes where room tariff of Rs 2500/ and above but less than Rs 5000/- per room per day 18% ITC Full Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises (including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises 18% ITC Full Accommodation in hotels including 5 star and above rated hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes, where room rent is Rs 5000/- and above per night per room 28% ITC Full

8 Comparison Chart Khandelwal Sharma & Co, Chartered Accountants Nature of Services Rates in GST Regime Rates in Present VAT Regime Restaurant Services 12% Full ITC Available Exempted 25/2012 - ST dated 01. 07. 2012 Entry No. 19 18% Full ITC Available If AC or CAHC during the year : Taxable (40% shall be service portion on total amount charged and hence ST will be charged on the same. Otherwise Exempted 25/2012 ST dated 01. 07. 2012 Entry No. 19 Restriction on CC on goods classifiable under chap 1 to §VAT on beverages: 14. 5% §Vat on cooked Food Except in Restaurants and Hotels categorised as 3 star or above and heritage hotels as ‘Grand’/’Classic’ : 5. 5% §VAT on cooked food in 3 star and above : 14. 5% §Vat on Food Served in Rest : 5. 5% §Pizza, Burgers, Sandwich, Hotdogs etc : 5. 5% §Under the Brand name by branded chain of cooked food : 14. 5% i. Supply of Foods/Drinks ii. No AC or CAHS anytime during the year iii. No Liquor License Restaurant Services i. Supply of Foods/Drinks ii. Have License to serve liquor 22 of CETA 1985.

9 Comparison Chart Khandelwal Sharma & Co, Chartered Accountants Nature of Services Rates in GST Regime Rates in Present ST Regime Restaurant Services 18% With Full ITC Taxable i. Supply of Foods/Drinks ii. AC or CAHS anytime during the year 40% shall be service portion on total amount charged and hence ST will be charged on the same. Restriction on CC on goods classifiable under chap 1 to 22 of CETA 1985. Restaurant Services i. Supply of Foods/Drinks ii. Air Conditioned Restaurant iii. 5 Star Hotel or Above Category 28% Full ITC Available Taxable 40% shall be service portion on total amount charged and hence ST will be charged Restriction on CC on goods classifiable under chap 1 to 22 of CETA 1985. on the same. Rates in Present VAT Regime

10 Khandelwal Sharma & Co, Chartered Accountants Comparison Chart Nature of Services Rates in GST Regime a) Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having room tariff Rs. 1000 and above but less than Rs. 2500 per room per day 12% With Full ITC a) Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having room tariff Rs. 2500 and above but less than Rs. 5000 per room per day 18% Full ITC Available b) c) a) b) c) Rates in Present Rates in ST Regime Present VAT Regime Governed by Not 26/2016; E: 6 b) Abatement : 40% c) CC allowed on input services only d) Exemption 25/2012 ; E 18 if declared tariff of a unit of accommodation below 1000/- or equivalent. a) Governed by Not 26/2016; E: 6 b) Abatement : 40% c) CC allowed on input services only

11 Comparison Chart Khandelwal Sharma & Co, Chartered Accountants Nature of Services Rates in GST Regime Rates in Present Rates in ST Regime Present VAT Regime a) Accommodation in hotels including 5 star and above rated hotels, inns, guest houses, clubs, campsites or b) other commercial places meant for residential or lodging purposes, c) where room rent is Rs 5000/ - and above per night per room 28% Full ITC a) Governed by Not 26/2016; E: 6 b) Abatement : 40% c) CC allowed on input services only Supply of Food/drinks in outdoor catering 18% Full ITC Available 60% shall be service portion on total amount charged and hence ST will be charged on the same. Restriction on CC on goods classifiable under chap 1 to 22 of CETA 1985.

12 Comparison Chart Khandelwal Sharma & Co, Chartered Accountants Nature of Services Rates in GST Regime Rates in Present Rates in ST Regime Present VAT Regime a) Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises (including hotel, convention centre, club, pandal, shamiana or any other place, b) specially arranged for organizing a function) together with renting of such premises 18% Full ITC a) Governed by Not 26/2016; E: 4 b) Abatement : 30% c) CC allowed on input services only

13 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Hospitality Industry a) This industry presently faces multiple tax regime and is a victim of tax over tax. GST will help reduce multiple taxation, giving a significant boost to the hospitality and tourism industry. b) The states which apply luxury tax on rack rates; like Tamil Nadu, Gujarat, Delhi and Andhra Pradesh, and those states which have high luxury taxes; like Kerala, have a total tax summed up to 19 -25 percent. The effect of GST will be positive, leading to a considerable reduction of 3. 5 -7% in taxes respectively. c)states The which lower levy luxury rates Maharashtra, like impact be the will GST of fairly neutral.

14 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Hospitality Industry d) Service providers having centralized registration will have to get registered in each state whether providing hotel services on own account or through agent (franchise). e) Service providers will have an option to take different registration or separate business verticals which needs to be examined on case to case basis. f) The procedure for all the invoices / receipts towards inward and outward supplies will become cumbersome as each one of them will have to be uploaded in the system. g) The frequency and number of returns to be filed will go up. h) Alcohol is out of the purview of GST net. The taxation on alcohol would be different than the single GST rate. Thus, the hotel industry would not be able to avail the input credit on the alcohol which will have a negative impact on this sector.

15 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Hospitality Industry k) In the luxury taxes act of some states, there are exemptions available on the basis of rate per day of accommodation. Such exemption on rate basis may not be available in the GST regime. l) Now, in GST Regime the ITC on Inputs, Capital Goods and Input Services shall be available. m) As per section 10(1)(b) of CGST/SCGST Act, the services provided by the restaurants whose aggregate turnover in the previous financial year does not exceed 50 lacs shall pay 2. 5% as CGST and 2. 5% as SGST, totalling to 5% under composition scheme. The composition restaurant suppliers will not be entitled to input tax credit. n) Section 9(3) – A draconian provision for the restaurant and hotels. o) Some questions still remain unsettled / unanswered. There are bound to be classification issues as well as litigation. Eg. Ordering through groupon/nearbuy, having dinner in a room of hotel.

16 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Hospitality Industry k) In the luxury taxes act of some states, there are exemptions available on the basis of rate per day of accommodation. Such exemption on rate basis may not be available in the GST regime. l) Now, in GST Regime the ITC on Inputs, Capital Goods and Input Services shall be available. m) As per section 10(1)(b) of CGST/SCGST Act, the services provided by the restaurants whose aggregate turnover in the previous financial year does not exceed 50 lacs shall pay 2. 5% as CGST and 2. 5% as SGST, totalling to 5% under composition scheme. The composition restaurant suppliers will not be entitled to input tax credit. n) Section 9(3) – A draconian provision for the restaurant and hotels. o) Some questions still remain unsettled / unanswered. There are bound to be classification issues as well as litigation. Eg. Ordering through groupon/nearbuy, having dinner in a room of hotel.

17 IMPACT OF GST ON TEXTILE SECTOR Khandelwal Sharma & Co, Chartered Accountants

18 Khandelwal Sharma & Co, Chartered Accountants About Textile Industry a) One of the oldest Industries b) One of the largest contributors to Indian Exports. Contributing about 11% of total exports of the country. c) Largest labour employment industry. d) 1. 2. The Textile industry can be broadly classified into two segments: Yarn & Fibre (Natural & Man-made) Processed Fabrics, Ready-made garments & Apparels

19 Khandelwal Sharma & Co, Chartered Accountants Current Taxability on Textiles a) In 2004, exemption was granted on textile articles falling under chapter 61, 62 and 63 from duty of excise by issuing Notification No. 30/2004 b) It was again subjected to duty in 2011 -12. After remaining liable for one year, it was rolled back by then finance minister P Chidambaram and since then textile was out of central excise purview. c) In Union Budget 2016 -17, branded readymade garments has again been made liable to duty of excise. d) Notification No. 15/2016 -CE has been issued amending the original exemption notification 30/2004. By Virtue of this exemption is withdrawn on all goods falling under chapter 61, 62 and 63 of CETA bearing a brand name or sold under a brand name and having a retail sale price (RSP) of Rs. 1000 and above. There would be two options for payment of duty: 2% without Cenvat and 12. 5% with Cenvat.

20 Khandelwal Sharma & Co, Chartered Accountants Current Taxability on Textiles e) Most of the textile products are either exempt or are taxed at a relatively lower rate and are extensively subsidized under different central and state regimes. Exports have continued to be free from taxes. f) Non-branded goods continue with “Nil” levy without CCR benefit. Otherwise, option of paying 6% with CCR in case of garments / articles of cotton, not containing any other textile material is available. g) Job Work In garment industry many times, brand name owners outsource the goods manufactured completely or on job work basis. There are special provisions that the central excise duty levy which in normal course should be with the job worker gets shifted to brand name owner. Such brand name owner instead of job-worker needs to register and comply with excise provisions. Brand name owner alternatively could authorize his job-worker to obtain registration and pay the duty on goods. h) Most of the states in India has exempted textiles and fabrics from levy of VAT. Garments including textiles are being subject to lower rate of VAT in many states. For example, in Karnataka state, ready made garments and other articles suffer lower rate of 5. 5% tax. Textiles are exempted from VAT. i) For small players, the option of paying taxes at concessional rates is also provided under composition scheme in many states.

21 Khandelwal Sharma & Co, Chartered Accountants Comparison between current rates vis-à-vis GST Rates Name of the product Current Rates Proposed Rates in GST Cotton and Natural Fibre Nil 5% All Categories of Yarn Nil 5% Silk and Jute Nil 0% Manmade Yarn, Synthetic Yarn, Manmade Fibre 18% Fabric 5% Branded Garments more than Rs. 1000 2% without CENVAT and 12. 5% with CENVAT (Chapter 61, 62, 63) : 7. 5 % (60% Tariff Value) 12% Other Garments/ articles of Cotton and not containing other textile : Nil (W/o Cenvat) and 6% w. o. CENVAT Others : Nil (W/o Cenvat) and 12. 5% w. o. CENVAT 5% (No overflow of credit allowed)

22 Khandelwal Sharma & Co, Chartered Accountants Issues in Current Tax Structure S. No. Issues Remarks 1. Compliance Cost for Small Scale Business Small Scale Composition Taxpayer is hesitant to join Credit chain as it increases the compliance cost. 2. No Input Credit 3. Branded Goods tax Most of Textile tax payer use composition scheme. Where Registered Taxpayer purchases goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Input Credit chain. Input Tax credit paid on the transaction is included in the cost of the product making the product costly. Affixing of the brand name on goods amounts to manufacture and the person affixing brand name would be liable to pay the excise duty.

23 Khandelwal Sharma & Co, Chartered Accountants Issues in Current Tax Structure S. No. Issues Remarks 4. Octroi and entry tax etc Increases Cascading effect thus increase the cost

24 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Textile Sector S. Issues No. Remarks 1. Improved compliances The value chain under the GST will be fully traceable. As a result, ITC claims will have to be backed by full information chain of purchases and sales. Improved compliance will automatically lead to higher revenues. 2. Revenue Neutral rate (RNR) proposed to be higher under GST Currently State VAT is 4 -5% on Apparels and 1. 2% of effective excise duty on branded garments with MRP more than 1000 Rs, the overall tax incidence on apparels is lower than 12%, which is the lowest rate being proposed in GST. If the Rate is expected to be come out as 12 % , the apparels retailers will not have sufficient credits available to be set off if the GST is not levied on yarn and fabrics.

25 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Textile Sector S. Issues No. Remarks 3. Higher Revenue to Central and State Government If the rate is expected to be 12%, it would count for high revenue to centre and state. Also non availability of credit would play a vital role in the revenue. 4. Fiscal barriers for inter-state movement to be removed Reduce time of movement and logistic costs, stocking costs and carrying costs. 5. Promote Capital investment textile players which are oriented towards domestic markets will be able to set-off the GST paid on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets. Taxes paid on purchase and installation of capital asset and equipment can be claimed as Cenvat credit

26 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Textile Sector S. Issues No. Remarks 6. Transparent Taxation 7. Duty Drawback relevance lose With Input tax credit chain becoming more transparent and integrated, the tax credit for exporters will become easier and full credit of indirect taxes can be claimed; and the duty drawback scheme, which aims to provide credit of indirect taxes, could lose relevance under GST. 8. Increase in administrative cost Most of the activities are out of tax net now and might get taxed in the GST regime. to In the current taxation, taxes are being paid on input are being added to cost as the finished product are exempt from Taxes. In GST, Textile Output will be taxed and Input Tax will be rebate whether in the case of export or for domestic use making taxation transparent.

27 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Textile Sector S. Issues No. 9. Registration Remarks Registration required to be obtained by small dealers when turnover exceeds the threshold limit. Composition scheme shall be available. Also, separate registration may be obtained for business verticals. 10. Returns Timely payment of taxes, filing of returns needs to be ensured in the GST for ensuring seamless flow of credit. 11 Accounting This department needs to be faster. 12. Goods Transfers as Stock Transfer of Goods to other place will be liable for GST if the transfer is in the course of inter-state trade. If there are separate dealerships of a dealer and separate GST registration number is obtained for each such dealership, then transfer of any supply between such dealerships will also be liable for GST.

28 Khandelwal Sharma & Co, Chartered Accountants Impact of GST on Textile Sector S. Issues No. Remarks 13. GST to be paid on advance booking GST has to be paid at the time of payment of advance whereas in the current VAT regime such system does not exist. 14. Returns Timely payment of taxes, filing of returns needs to be ensured in the GST for ensuring seamless flow of credit.

29 Thank you !! Khandelwal Sharma & Co, Chartered Accountants