Monday, November 5, 2012

Opinion on Chargeability of Service Tax on Certain Services Provided by Hotel incorporated as a Private Limited Company

1.       Airport transfers, pick-up and drop facility
2.       Sight-seeing income
3.       Income from swimming pool, internet facility, etc. incidental to hotel business
4.       Classification in case of bundled services

I.                  Airport Transfer Facility

If the hotel provides airport transfer facility and charges for it separately in the bill, it should be covered under the definition for hiring/renting of cab for transfer of passengers.

Services of transport of contract carriage are not exempt if they are meant for tourism, conducted tours, charter or hire. The taxable value under renting of motor vehicle under abatement is 40% where no CENVAT credit is available. The effect of reverse charge mechanism is described as below.

Reverse charge on renting of motor vehicle:
Service Provider
Service Receiver
Renting or hiring of motor vehicle deigned to carry passenger to any person who is not in similar line of business.
Individual, HUF, proprietorship or partnership firm, AOP located in taxable territory.
Business entity registered as body corporate in taxable territory.
100% liability is of service receiver who is a business entity where tax on 40% of value has been calculated by provider of service.

If the service provider wishes to avail CENVAT credit, it can pay service tax on 60% of total gross value and service receiver shall be liable to pay tax on 40% of total gross value.

Since the Pvt. Ltd. hotel is not covered under Service Providers as specified above, reverse charge is not applicable. The hotel will have to deposit service tax @12.36% on the value of service as charged in the bill if it intends to claim CENVAT credit on such services. Otherwise, service tax @4.944% may be deposited and no CENVAT credit may be availed.

II.               Sight-seeing Income

Sight-seeing services provided by the hotel are in the nature of tour & travel services and should be chargeable to service tax accordingly. The percentage of total bill amount taxable is given below.

Service in relation to
Taxable Value
CENVAT Credit available
Bill/Challan issued to contain
(i)  a package tour
The bill issued for this purpose indicates that it is inclusive of charges for such a tour.
(ii)  a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

The invoice, bill or challan issued indicates that it is towards the charges for such accommodation.
This exemption shall not apply in such cases where the invoice, bill or challan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.
(iii) any services other than specified at (i) and (ii) above.
The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

III.           Income from Other Ancillary Services

The major impact and changes in the provisions relating to the Hotel industry can be tabulated as under:
S. No.
Prior to 1-7-2012
Post 1-7-2012
Taxability of Food supplied in Restaurants serving liquor and being Air conditioned
Accommodation in a Hotel for declared tariff of more than Rs. 1,000/- per day
Taxable for period for less than continuous three months
Taxable without any exclusion of period
Mandap Keepers' Service, Outdoor catering Service
Laundry Services (i.e. ‘Dry cleaning’ as well as ‘wet cleaning’), Telephone services, No Show charges, cancellation charges, etc.
Not taxable unless specifically defined
Taxable in view of the expanded definition of services
Sale of space/time for advertisement other than by radio/television broadcast
Food supplied in Restaurants serving liquor and being Air conditioned
Taxable value : 30%
Taxable value : 40%
i.e. 4.944%
Accommodation in a Hotel for declared tariff of more than Rs. 1,000/- per day
Taxable value : 50%
Taxable value : 60%
i.e. 7.416%
Supply of food as a part of function for renting
Taxable value: 60%
Taxable value: 70%
i.e. 8.652%
Any other Service (excluding Banking and Financial Services)
Taxable value: 100%
Taxable value: 100%
i.e. 12.36%

IV.            Classification in case of Bundled Services 
In case of an event, which is a mix of various overlapping services, the service which gives the most pre-dominant color would be the category under which the same should be taxed as per the new Section 66F of the Finance Act, 1994 as made applicable from 1-7-2012. 

In our opinion:

a) In case of 2N/3D package for accommodation with meals; the pre-dominant category would be accommodation even if the customer has food in the same restaurant like other walk- in customers. Hence, the hotel needs to charge service tax on 60% value of the total consideration.

b) In case of a Residential conference or a marriage; where a package has been designed for say three days including conference facilities, food, accommodation; since the pre-dominant intention is arranging of a function, the correct classification would be “Mandap keeper” and hence the hotel needs to charge service tax on 70% value of the total consideration. 

Note: For further clarification, please refer Relevant Notification No. 26/2012 dated 20.06.2012