GST ON FOOD SUPPLIED IN TAKE AWAY COUNTERS

 

In a recent ruling, Hon'ble Advance Ruling Authority (AAR) in West Bengal has considered certain issues pertaining to restaurant services. 

The decision is summarized for your reference:

·       Supply of food and beverages from Take - Away Counters

In the case of supply of food and beverages from the take away counter, where the customers have no provision to consume the same in the premises, AAR has concluded that such supply of goods without any element of service shall be categorized as supply of goods.

The AAR also held that the applicant is eligible to avail input tax credit in respect of such supply of goods, subject to conditions laid down in CGST Act and rules made thereunder.

Supply of food and beverages in the restaurant

In the case of food or beverages served in the restaurant, AAR held that supply of food items and beverages by the applicant which offers the facility of eating in the same premises along with takeaway of the same shall be treated as restaurant services and shall attract tax at the rate of 5%.

AAR also held that the credit of input tax charged on goods and services used in supplying the service shall not be available.

With respect to the common input tax credit, it was held that the applicant shall follow the principle of apportionment of credit as laid down in sub-section (1) and (2) of section 17 of the GST Act read with rule 42 and 43 of the CGST/WBGST Rules, 2017 in respect of common input tax credit in the form of inputs, input services and capital goods.

Due to lack of clarity on the issue, many restaurants are incurring expenses in the form of rentals, royalty payments and other purchases on which GST is charged by the supplier. 

However, input tax credit is currently not available since restaurant services are taxed at the rate of 5% (without ITC).

On the basis of the advance ruling summarized above, where the restaurants have a dedicated take - away counter, GST can be charged by the restaurants and ITC can also be availed by the restaurants.

It is my view that by charging GST on food supplied through take - away counters, restaurants can avail input tax credit on the inputs and input services which are specifically used in the take-away counter and also ITC on common inputs and input services.  

(Please write to me at muthukumaran.adv@gmail.com for any queries in this regard)

EFFECT OF TAX CLAUSES IN CONTRACTS - POST GST EFFECT

While drafting supply contracts or long term supply contracts, the clause that is often overlooked is the price clause or the tax clause. The price clause does not generally set out whether the price is inclusive or exclusive of taxes. Tax clauses in an agreement deal with deductions in the form of TDS and fails to take into account the indirect taxes payable on the supply of goods or services.

With the Goods and Services Tax being implemented, companies are revisiting their existing contracts to modify the price clause or the tax clause to factor the increase in rate of taxes. While this is understandable and advisable when the parties are willing to re - negotiate the price.

However, in a scenario where contracting party is not willing to re - negotiate the terms of the contract, is there any protection available for such suppliers?

It is not known to many that the remedy is available in Sale of Goods Act, 1930 (“Sale of Goods Act” or “Act”) . The Act provides cover to seller in the course of increase in rate of tax. Section 64A of the Sale of Goods Act is the relevant provision which is extracted below:

     64A. In contracts of sale, amount of increased or decreased taxes to be added or deducted

1.      Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulations as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such good tax- paid where tax was chargeable at that time.-

a.      if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition, and

b.      if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer made deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction.

2.      The provisions of sub-section (1) apply to the following taxes, namely:-

a.      any duty of customs or excise on goods.

b.      any tax on the sale or purchase of goods.

The above provision provides that in case of increase in the rate of excise duty or customs duty or sales tax (or VAT). The seller has the option to increase the contract price to factor the increase in rate of tax.

Similarly, in the case of decrease in rate of tax, the Sale of Goods Act provides that the buyer may deduct the decrease in tax amount from the payments due to the seller.

In both the scenarios, the statute gives protection to the seller and buyer from being sued as such deduction will not be considered as breach of contract by the supplier.

Concluding thoughts

It may be noted that the statutory cover is available only when the agreement is silent on increase in rate of taxes and who will bear the incidence of such taxes.

Further, the Act only contemplates increase or decrease in rate of customs duty, excise duty and VAT. Therefore, any increase in rate of service tax will not be covered under this Act and the supplier of service has no statutory remedy in such situations.

Since, Section 64A(2) of the Act specifically deals with increase in rate of customs duty, excise duty and sales tax, will the provision become redundant when the taxes are subsumed in GST.

On the contra, can we take resort under Section 64A(2)(b) which covers "any tax on the sale or purchase of goods". Therefore, will it be possible to argue that when the under GST is for sale or purchase of goods, the supplier will be covered under the said provision if the buyer refuses to compensate the buyer for the increase in rate of taxes.

A suitable amendment clarifying the above anomalies will help the industry.