Under negative list based taxation, service tax is levied on service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) are supplied in any manner as part of the activity.
Without getting into validity of ST levy on supply of food or drink, we have examined whether credits can be availed by hotel when it pays service tax on abated values of services?
What is cenvat credit Scheme?
Cenvat scheme is a beneficent piece of legislation and unless it is shown that the items are specifically excluded from the definitions of the terms “inputs”, “input service” or “capital goods”, Cenvat Credit cannot be denied.
It should be ensured that the credits are not restricted as per definition of inputs, input services or capital goods prior to availment.
Whether credits on exempted services can be availed?
The cenvat credit cannot be availed on inputs, input services, capital goods which are used to provide exempted services. Rule 2(e) of Cenvat Credit Rules defines exempted services to mean
- output services which are exempted from the whole of the service tax leviable thereon, or
- services on which no service tax is leviable under section 66B of Finance Act or
- the output services whose part of the value is exempted on the condition that no credit of inputs and input services used for providing such output service can be taken. But shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.’
Credit availment by hotels and restaurants
As far as the restaurant and also for accommodation service, on which a portion is exempted, there is no condition that credit of inputs and input services used for providing such output service cannot be availed. In other words, it is not exempted service.
Cenvat credit Scheme and Hotels
The service tax would be paid on 40% of the total amount received. The credits on eligible inputs [other than those of Chapter headings 1-22 of CE Tariff], input services and capital goods used for providing such taxable services can be availed.
Most of the hotels are collecting and paying service tax. They are not availing cenvat credit due to a misunderstanding that hotels and restaurants paying service tax on abated value, cannot take benefit of Cenvat Credit Scheme.
The cenvat credit of eligible inputs, input services and capital goods in relation to restaurant (other than inputs of Chapter heading 1-22 of Central Excise Tariff) can be availed fully if company were doing only that activity.
Though under earlier service tax law till 1.7.12, when abatement option was opted for taxable services such as catering, restaurant, accommodation services, mandap keeper services there was a specific restriction to avail the cenvat credit on inputs, input services and capital goods used for providing such taxable services. The credit related to restaurant services are restricted till 1.7.12 and could not have been availed at that time.
Present position on cenvat credit availment is as follows for hospitality sector:
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Taxable services |
Taxable portion |
Eligibility of cenvat credit |
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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 egmandap keeper services |
70% |
(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.The credit on other inputs, input services and capital goods used for providing such taxable services can be availed. |
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Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or |
60% |
CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the |
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lodging purposes. |
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provisions of the CENVAT Credit Rules, 2004.The credit on input services used for providing such taxable services can be availed. |
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Restaurant service. |
40% |
(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken. The credit on other inputs, input services and capital goods used for providing such taxable services can be availed. |
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Outdoor catering |
60% |
(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service cannot be availed. The credit on other inputs, input services and capital goods used for providing such taxable services can be availed. |
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The doubt in the industry is whether the abated portion is an exemption. Consequently the credit could be restricted. Some of the big players in hospitality sector are seen to be erring on side of caution even now. They are not availing credit on inputs and input services attributable to the abated values of services such as restaurant service.
In other words for example if credit like AMC, rentals of hotel premises is Rs 100000, value of total amount charged by restaurant from customers is Rs 100 Lakhs. The credit of merely Rs 40000(40%) is being availed by such service provider as follows - Rs 1 Lakh *40 Lakhs[taxable portion on which ST paid]/100 Lakhs. Though this is not prescribed by law, it is nevertheless being followed as a measure of abundant caution.
Till 1.9.14 there was no time bar for availment of credit under Cenvat Credit Rules. In absence of time limit credit could be availed for upto 6-7 years for past. Now due to amendments in rules, a manufacturer or a service provider shall take credit on inputs and input services within a period of six months from the date of issue of invoice, bill or challan
w.e.f. 1st September,2014. It needs to be noted that wef 1.3.2015 the eligible credit on inputs and input services to be availed within 1 year of invoice date.
In opinion of paper writers eligible credit could be availed by the restaurant and accommodation service providers wef 1.7.12. However it maybe better to intimate the methodology of availment of credit by RPAD letter to range to avoid later demands and litigation in this regard.