GST Update ON 18% GST for aerated water supplied in hotel restaurants, 28% for cigarettes: AAR 143/2020-21

In the recent advance ruling of MFAR Hotels & Resorts Private Ltd. (GST AAR Tamilnadu), the Applicant owns and manages Hotels & Resorts. The applicant has applied for Advance Ruling on the following matters:

Rate of tax on supply of soft beverages and tobacco when supplied independently and not as composite supply in the restaurant.
Taxability of supply of liquor
Taxability of supplies free food to the employees

At the time of submission of application, the second and third question were as follows-
2. Whether supply of liquor is deemed to be the “exempt supply” under GST Act as per Section 2(47) of CGST Act for the purpose of proportionate reversal of ITC as per Rule 42 of CGST rules 2017?
3. It is obligatory on the part of employer to supply free food to the employees. Whether such free supply of food is liable to reverse ITC on inputs as per Rule 42 of CGST Rules 2017?
However, during Personal Hearing held on 30.08.2019, the applicant stated that in respect of 2nd and 3rd question, they wish to rephrase the questions and hence it was changed to initially mentioned questions.
The applicant submitted that it provides a variety of services such as rooms, suits banquets, dinning spa etc. At times it supplies Aerated beverages, water and tobacco to the guests not as part of the food in the buffet or as composite supply and the billing of such items is done separate. The applicant stated that it charges 28% + Cess on cigarettes whereas customers claim the tax rate to be 18% as part of composite supply. The applicant further stated that the food provided to employees is from a separate in-house canteen but procurement of raw material is common.
On the matter of supply of aerated beverages and tobacco products in the restaurant and to the room guests, the definition of supply and composite supply along with section 8 was examined by the AAR. The Authority also observed that Aerated beverages and Tobacco products are also listed on the menu of the hotel and one can simply order the beverage or the cigarette without ordering any other food item. When a guest (resident or non-resident) comes to the restaurant and orders from the menu either soft beverages or aerated water, it involves supply of goods (soft beverages/aerated waters) and supply of services by the restaurant. In this case both the supplies are taxable. The serving of any items on the menu involves the supply of the items along with the use of the facilities/ staff of the restaurant. These two are naturally bundled and supplied in conjunction each other and hence is a composite supply as per Section 2(30) of the Act. Hence, it is in nature of restaurant service will be taxable at 18% since the hotel is a 5-star hotel and that room rent is more than Rs. 7000/-.
In case of the tobacco products the AAR ruled that supply of cigarette is not simply the supply of goods. Sale of cigarettes products are not naturally bundled together with the restaurant services as the services of the restaurant involves serving of food and beverages alone in the normal course. Therefore, it is not a composite supply as per Section 2(30) of the Act. And since it is not naturally bundled the same is a mixed supply. Therefore, the highest rate of the cigarette i.e. 28% shall be applicable.
On the question of alcoholic liquor, the AAR ruled that since it is not taxable as per CGST Act, GST on the same is not to be charged.
On the question of supply of free food to employees, the AAR ruled that employees are related persons. Thereby under Para 2 to Schedule 1 the supply of food to employees is a supply of service and taxable at the rate of 18%.
This AAR ruling has been very contradictory in the first question raised. In case of supply of beverages/aerated water in restaurants, the supply is naturally bundled with services; while in the case of supply of cigarettes, supply and services are not naturally bundled is a peculiar observation. The AAR made no distinction between supply of aerated beverages and food if supplied independently in restaurant or room. However, by this ruling even when a customer orders no food and simply aerated beverage/water, the same would be taxable as restaurant service. This would be alarming situation for all the restaurants as it is common practice of serving beverages all alone.

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GST Update ON 18% GST for aerated water supplied in hotel restaurants, 28% for cigarettes: AAR 143/2020-21

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