As service tax is concerned the same has been applicable to the hotel industry since very long in relation to the banqueting service and related catering services.

After 1-7-2012, we would practically have all services provided by a hotel under the ambit of the extended definition of services and would perhaps have very less services as excluded or exempt. Further, the valuation in respect of services provided by a hotel and the Cenvat Credit Rules relating thereto have also undergone a sea change as made effective from 1-7-2012.

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Service tax include

Room rentals

► Restaurant services

► Banquet services

► Convention services

► Club membership

► Rent a cab services

► Dry cleaning services

► Health club/ Spa/ Beauty parlour services

► Renting of immovable property

► Internet services

► Money changing services

Cenvat Credit allowed with Abatement:-

In most of the services offered by a hotel, the abatement facility has been continued even in the negative list. However, as an add-on, the facility of Cenvat Credit has also been extended. On Mandap Keeper services abatement @ 30% has been extended with Cenvat facility under the notification no. 13/2012-ST dated 17.3.2012. However, on supply of food items in restaurant and as an outdoor caterer, taxable value has been fixed as 40% & 60% (or abatement of 60% & 40%) respectively with the facility of Cenvat Credit by inserting a new rule 2C in the Service Tax (Determination of Value) Rules, 2006. In all the three cases, the facility of Cenvat credit includes the credit on input services, capital goods and inputs other than those falling under chapter 1 to 22. Though there is reduction in the proportion of abatement but simultaneously the credit is allowed which will ultimately reduce the costs. Thus, cash outflow has reduced drastically which will reduce ultimately the cost of service providers. Since a major part of income of hotels comes from the Mandap Keeper Services, they will be benefitted by this amendment at large.

The services on which abatement is being granted subject to the condition of non-availment of credit are covered in the definition of exempted services. Prior to enactment of budget, 2012; the abatement was allowed under the provisions of notification no. 1/2006-ST dated 1.3.2006 which clearly stated that the benefit under this notification will be allowed only if no Cenvat Credit is taken. Therefore, the abatement vis a vis Cenvat were not allowed and as such, the services on which abatement was claimed were treated as “exempted services”

Now w.e.f. 1.7.2012, the Cenvat Credit will be allowed alongwith abatement in case of certain services like Mandap Keeper, restaurant services, outdoor catering services, etc. these services will come out of the definition of exempted services. Accordingly, these services will be considered as “taxable services” for the purpose of Cenvat Credit Rules, 2004. As such, entire value pertaining to these services will be considered as taxable value.

This contention is also supported by Board circular no. 868/6/2008-CX dated 9.5.2008 which clarifies that for the purpose of rule 6(3) of the Cenvat Credit Rules, 2004; the value of exempted services will be the gross value before abatement. Since the services on which Cenvat is allowed alongwith abatement will come out of purview of exempted services and will be treated as taxable services. Therefore, the gross value charged for such services will be treated as taxable receipts on the analogy laid down by the above stated circular. Due to this, the quantum of taxable receipts will highly increase.

Increase in taxable receipts, decrease in proportionate reversal:-

Rule 6 of the Cenvat Credit Rules, 2004 is the most critical aspect for the service providers like hotels which offer a bouquet of services, both exempted as well as taxable. As of now, many of the services provided by the hotel were exempt, due to which the ratio of reversal under rule 6(3)(ii) is very high. The services normally provided by the hotels which are exempt currently are washing services, telephone facility, etc. and are going to be taxable as from 1.7.2012. Further, as per above discussion, the entire receipts from specified services like Mandap Keeper will be considered in the receipts from taxable services. In other words, the quantum of exempted services will reduce drastically. Since the formula of proportionate reversal depends on the quantum of exempted services, lower the receipts from exempted services lower the amount of reversal. For the sake of convenience, rule 6(3) which prescribes the formula for reversing the credit attributable to common input services is produced as follows:-

Total value of exempted services/Total value of exempted and taxable services * Total Cenvat Credit availed = Proportionate reversal

Now w.e.f. 1.7.2012 when most of the services are going to be taxable, there will be very less amount of exempted service. Since the no. of exempted services has reduced drastically, they can now think of a simpler method as given under rule 6(3)(i) which is simple reversal @ 6% of the value of exempted services. As such, many of the large hotels are doing cost-benefit analysis of these two options as given under rule 6(3) of the Cenvat Credit Rules, 2004. Thus, negative list has given them a chance to get rid of the cumbersome procedure of proportionate reversal.

The negative list of services is going to shuffle the entire service tax law. Out of many ambiguities and lacunas therein, the hotel industry seems to have been benefitted. Though the ultimate benefit available will be known only after the implementation of new provisions, yet, we can say that the Negative list seems to be positive for the Hotel Industry.

For arriving at the service component, an abatement of 60% has been provided for food sold under Rule 2C of Service Tax (Determination of Value) Rules, 2006 and the rest of the bill amount (i.e 40%) relates to services provided by restaurant on which restaurant is liable to pay service tax. Hence from now on Dominoz, Pizza-Hut, KFC, Mc-Donald etc will be liable to pay tax. However service tax would not be applicable for Home Delivery.

In our view, therefore the price that the customer pays for the supply of goods in a restaurant cannot be split up as suggested by learned counsel. The supply of food by the restaurant owner to the customer though it may be a part of service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery , music, a dance floor, and a floor show, is what is the subject of levy. The patron of fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be R50/- on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays R50/- for its supply and it is on R50/- that the restaurant owner must be taxed.”

Although this judgement didn’t comment on whether sale of food in a restaurant is a service or otherwise since this was not the matter before the Hon. Supreme court; the view that no service tax can be levied on sale of food in a restaurant carries good weightage in terms of the fact that when the entire consideration is towards “sale of food”, there is no scope to vivisect and make part of it taxable under service tax.

The new definition of service; coupled with issues in interpreting the exclusions and exemptions is going to be a challenge for every service provider. Additionally, the responsibility to pay tax in case of new categories for reverse charge mechanism and even the joint mechanism - casting responsibility to pay tax on payment to contractors as well - would pose immense challenge before the industry in complying with the law. The only positive take away of all the amendments post 1-7-2012, is the eligibility to avail CENVAT credit to a great extent which was hitherto not available. ▪

overlapping with another State subject, viz.”Luxury Tax”?

Short term accommodation provided for less than three continuous months (this condition has been removed from 1-7-2012) had been made taxable from 1-5-2011 if declared tariff is more than R1,000/- per day. An abatement of 50% has been provided under this category. Here again, it may be noted that there is a levy of "Luxury Tax" on hotel accommodation in most of the states. The issue of double taxation would arise here as well albeit the case would be a little different than that above