HC asks Centre, State to explore possibility of two tier rate structure for standalone restaurants

Shishir Sinha, Meenakshi Verma Ambwani New Delhi | Updated on November 19, 2019

Gujarat High Court has asked the Centre and State to explore the possibility of two tier rate structure for restaurants.

The GST Council, in its 23rd meeting on November 10, 2017, decided that all stand-alone restaurants irrespective of air conditioned or otherwise, will attract 5 per cent GST without ITC. Food parcels (or takeaways) will also attract 5 per cent GST without ITC. This caused lot of discomfort for the restaurants and they appealed to the Government to reconsider the proposal and allow ITC with higher rate. When nothing happened, then fast food chain McDonald’s franchise for Western and Southern India, Hardcastle Restaurants approached Gujarat HC.

After preliminary hearing, the Court has issued notices to four respondents, Centre, Gujarat State Government, the GST Council and the Assistant Commissioner of Goods & Service Tax and posted the matter for December 11. In the meanwhile, as the Court said, “the respondent shall consider and report to this court as to what amount can be taken to secure to the petitioners the option to discharge GST either at the rate of 18 per cent with full input tax credit or at the rate of 5 per cent without input tax credit.”

Commenting on the development, a spokesperson for Hardcastle Restaurants said, "We only seek to request the government to consider giving us an option to claim ITC. Over the years, we have invested significantly in creating a world-class ecosystem that includes an organized supply chain, capital goods procurement and availing of many other services that are critical to our business. The unavailability of ITC poses a significant challenge for us to scale and run our business in a sustainable way.”

Rajat Mohan, Senior Partner with AMRG & Associates said that GST was always conceived as a value-added tax, however slowly government has harmed the basic structure of GST by moving away from the mechanism of tax credit. “Real-Estate sector and Hospitality are one of the worst-hit sectors which are incurring colossal tax costs due to tax credit restriction,” he said.

Abhishek Jain, Tax Partner with EY felt that lower rate while optically has fared well with customers, a denial of input tax credit to restaurant businesses have increased their tax costs. “These businesses have for long been discussing with the Government on an optional higher rate with ITC and would now also look forward to the final High Court Ruling on this," he said.


While presenting the case before the Court, counsel for the petitioner said that for the first time such rate (5 per cent) has been made mandatory and the option to pay 18 per cent GST with full ITC has been removed for the restaurant sector. It was submitted that thus, the Explanation takes away the right of the restaurant sector to avail the option of paying higher rate of tax and availing input tax credit.

It was submitted that in the present case, the provision whereby the right of the petitioner is restricted is introduced by virtue of a notification and is not prescribed by the rules. It was also said that explanation is also arbitrary inasmuch as, in case of other services, there is an option to pay a higher rate of tax and avail of input tax credit, whereas in case of the restaurant sector, such option has not been granted which amounts to total denial of input tax credit.

Published on November 19, 2019

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