Hardcastle Restaurants Private Limited (“Hardcastle” or “the petitioner”) has filed a special civil application in the Hon’ble Gujarat High Court inviting the attention of the Court towards Notification No. 46/2017 – Central Tax dated November 14th, 2017 (“impugned notification”) and submitted that by virtue of the said notification, the rate of tax for the restaurant sector has been fixed at 5% (CGST – 2.5% & SGST 2.5%) without any input tax credit (“ITC”).
Reference was made to the Explanation inserted vide the impugned notification whereby it is inter alia clarified that supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash, deferred payment or other valuable consideration, provided by a restaurant shall attract CGST @ 2.5% and SGST @ 2.5% without any ITC under item (1).
It was submitted that for the first time such rate has been made mandatory, that is, the option to pay 18% 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.
Whether the restriction of the ITC by such impugned notification is valid in the eyes of law?
It was submitted that the notification has been issued in exercise of powers conferred under sub-section(1) of section 9, sub-section (1) of section 11, sub-section (5) of section 15 and subsection (1) of section 16 of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”). Referring to sub-section (1) of section 16 of the CGST Act, it was pointed out that the same provisions provides that every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49 be entitled to take credit of input tax charged on any supply of goods or services or both, to mean which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person. Reference was made to sub-section (87) of section 2 of the CGST Act which defines the expression prescribed to mean “prescribed” by rules made under the CGST Act on the recommendations of the GST council.
It was further submitted that in the present case, the provision whereby the right of the petitioner is restricted is introduced by virtue of a notification & is not prescribed by the rules. Moreover, under sub-section (1) of section 16 of the CGST Act, a condition or a restriction can be imposed, however, it is not permissible to deny/extinguish the right to avail of credit thereunder.
It was submitted that the 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 ITC, whereas in case of the restaurant sector, such option has not been granted which amounts to total denial of ITC.
The Hon’ble Gujarat HC passed the following ruling in the matter of Special Civil Application No. 19835 of 2019 dated November 14th, 2019 observing as under:
“Having regard to the submissions advanced by learned counsel for the petitioner, issue notice, returnable on December 11th, 2019. In the meanwhile, 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% with full ITC or at the rate of 5% without ITC.”