UTILISATION OF ITC FOR DISCHARGE OF GST ON SUPPLY OF RESTAURANT SERVICES

INTRODUCTION

The highlight of45 GST Council meeting held on September 17, 2021, was the recommendation to transfer the liability to pay Goods and Services Tax ('GST') on 'restaurant services' from restaurant service provider to the e-commerce operators ('ECOs'), such as Zomato and Swiggy. In terms of the recommendation, the Central Government issued Notification No. 17/2021-CentralTax (Rate) dated November 18, 2021 ('Notification') under Section 9(5) of the Central Goods and Services Tax

S. No - 6

Issue - Would ECOs be liable to reverse proportional input tax credit on his input goods and services for the reason that input tax credit is not admissible on 'restaurant service'?

Clarification - ECOs provide their own services as an electronic platform and an intermediary for which it would acquire inputs/input service on which ECOs avail input tax credit (ITC). The ECO charges commission/fee etc. for the services it provides. The ITC is utilised by ECO for payment of GST on services provided by ECO on its own account (say, to a restaurant). The situation in this regard remains unchanged even after ECO is made liable to pay tax on restaurant service. ECO would be eligible to ITC as before. Accordingly, it is clarified that ECO shall not be required to reverse ITC on account of restaurant services on which it pays GST in terms of section 9(5) of the Act.

It may also be noted that on restaurant service, ECO shall pay the entire GST liability in cash (No ITC could be utilised for payment of GST on restaurant service supplied through ECO)

S. No - 7

Issue - Can ECO utilize its Input Tax Credit to pay tax w.r.t 'restaurant service' supplied through the ECO?

Clarification - No. As stated above, the liability of payment of tax by ECO as per section 9(5) shall be discharged in cash.

Act, 2017 ('CGST Act'), and brought the same into effect from January 1, 2022. The CBIC issued Circular No. 167/23/2021-GST dated December 17, 2021 ('Circular') to clarify several substantive and procedural issues arising with respect to the applicability of amendment. Paragraphs 6 and 7 of the Circular state as under:

The Circular prohibits ECOs from utilising ITC for discharge of tax on 'restaurant service' and mandates that the same be paid through cash alone.

ANALYSIS OFTHE LEGALPROVISIONS

Section 9(5) of the CGST Act empowers the Government to notify categories of services, the tax on which will be paid by the ECO if the same are provided through it. The ECO steps into the shoes of the actual supplier of the service. The Notification No. 11/2017-Central Tax (Rate) dated June 28, 2017 ('Rate Notification') provides GST rates applicable on supply of various services. S. No. 7(ii) thereof provides for a concessional rate of 5 per cent. on 'restaurant service other than at specified premises', subject to the following restriction:

“Provided that credit of input tax charged on goods and services used in supplying the service has not been taken”

From the above, it follows that the suppliers of restaurant services are not allowed to 'take' ITC on inputs and input services used for providing restaurant service. In terms of Section 9(5) of the CGST Act, ECO steps into the shoes of supplier whilst discharging GST liability on 'restaurant service'. The condition under Entry 7(ii) of the Rate Notification forms the sole basis for the prohibition on utilisation of ITC under the Circular.

At this juncture, it is pertinent to highlight that the term 'taken' is co-terminus with 'availment' of ITC on inputs and input services attributable to the restaurant service. It is trite that 'availment of ITC' and 'utilisation of ITC' are two separate stages under the CGST Act. Section 41(1) of the CGST Act allows the registered person to 'take' eligible ITC in his electronic credit ledger ('Credit Ledger'), whereas Section 41(2) read with Section 49 provide for its 'utilisation' for payment of output tax. It is pertinent to highlight that the condition under Entry 7(ii) of the Rate Notification extends only to the availment of ITC. The Rate Notification nowhere restricts the utilisation of ITC otherwise available to the supplier for discharge the output tax on 'restaurant service'. Therefore, ECOs cannot avail ITC attributable to restaurant service, but there is no restriction on the ECO to utilise the ITC otherwise available in its Credit Ledger. In any event, the CGST Act does not require oneto-one co-relation between inputs / input service and the output supply. Once the ITC is properly availed in the Credit Ledger, it loses its specificity and can be utilised for discharge of any outward tax liability.

SIMILAR RESTRICTIONS UNDER ERSTWHILE REGIME

In the present context, it is important to recall the treatment meted out to similar restrictions vis-à-vis availment of cenvat credit under the erstwhile tax regime. The Cenvat Credit Rules, 2004 ('Credit Rules') was the sole and primary piece of legislation governing all aspects of cenvat credit. Rule 3(1) inter alia allowed a 'provider of output service' to 'take' credit of specific duties of excise and service tax, and Rule 3(4) allowed the utilisation of cenvat credit for discharge of service tax on output service. Issues often arose regarding utilisation of cenvat credit availed on inputs and input services received for provision of output services, for the discharge of excise duty on final products cleared from the factory premises. These issues were all decided in favour of the taxpayers.

Similarly, prior to 2011, issues regarding utilisation of ITC for payment of service tax under reverse charge mechanism were rampant. The revenue often placed reliance on Rule 5 of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 ('Import of Service Rules'), which stated that taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availment of cenvat credit. The High Courts noted that the restriction under Rule 5 of the Import of Service Rules extended only till availment of cenvat credit attributable to such imported service and held that the same could not be used to restrict utilisation of credit otherwise available to the service recipient towards such tax liability1. The Government acknowledged this legislative lacuna and amended Rule 3(4) of the Credit Rules vide Notification No. 28/2012-CE(NT) dated June 20, 2012, to insert an Explanation which specifically prohibited service recipients operating under reverse charge mechanism from utilising cenvat credit for payment of service tax.

CONCLUSION

In the present case, there is no statutory provision under the CGST Act which prohibits the utilisation of ITC for payment of output tax on restaurant service, the restriction operates only to prevent availment of ITC attributable thereto. Therefore, the CBIC has clearly transgressed the confines of delegated legislation by imposing a blatant prohibition on ECOs from utilising the ITC to discharge output tax liability on restaurant service and mandating that the same be paid only through cash. It is a settled legal position that Circulars issued by the CBIC are not binding on the taxpayers. A tax payer is bound by the letter of the law, not the opinions set forth by the revenue. Therefore, in light of the clear wording of the statutory provisions and the historical treatment of similar restrictions, ECOs should be entitled to discharge the tax liability on restaurant service through the ITC available in the Credit Ledger and the vires of the Circular may be challenged before the Courts.